“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, January 29, 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 - Microsoft Corporation (NASDAQ:MSFT) Calls

Tuesday, January 30, 2018

** OPTION TRADE: Buy the MSFT MARCH 16 2018 97.500 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

Microsoft Corporation (NASDAQ:MSFT), the tech titan, will report earnings tomorrow, Wednesday, January 31, 2018, after the market closes. The consensus earnings estimate is $0.86 per share on revenue of $28.35 billion and the Earnings Whisper number is $0.90 per share. Consensus estimates are for year-over-year earnings growth of 3.61% with revenue increasing by 17.68%.

The software giant continues to earn respect for solid growth in its cloud computing businesses, such as Azure and Office 365.

In recent years, demand for personal computers-and related software-has fallen around the world. This has forced Microsoft to move to a "freemium" model with Windows 10, to focus instead on monetizing compatible apps and services. Microsoft saw its More Personal Computing sales grow a lackluster 0.9% to hit $9.4 billion last quarter.

Also, Microsoft has evolved through the aggressive growth of its Azure division. Azure is Microsoft’s cloud computing platform that builds, deploys, and manages applications and web services through the company’s own network of data centers. This unit has been growing at a nearly triple-digit rate over the past year or so.

In its upcoming second-quarter, Microsoft is expected to post More Personal Computing revenues of $12.012 billion.

Short interest has decreased by 9.6% since the company's last earnings release while the stock has drifted higher by 11.6% from its open following the earnings release to be 23.7% above its 200 day moving average of $76.02. Overall earnings estimates have been revised higher since the company's last earnings release.

Microsoft Co. has a 1 year low of $62.75 and a 1 year high of $95.45. The company has a quick ratio of 3.06, a current ratio of 3.12 and a debt-to-equity ratio of 0.91. The firm has a market capitalization of $724,550.00, a PE ratio of 31.73, a PEG ratio of 2.21 and a beta of 0.99.

Influencing Factors

Microsoft operates under three primary business segments: Productivity & Business Processes, Intelligent Cloud, and More Personal Computing.

Microsoft will report Productivity & Business Processes revenues of $8.877 billion, which would represent year-over-year growth of about 20.3%. Last quarter, Microsoft reported revenues of $8.238 billion in this unit, up about 23.7% year-over-year. Year-over-year comparisons will benefit from the company’s acquisition of LinkedIn, which closed in Dec. 2016.

Microsoft will report Intelligent Cloud revenues of $7.501 billion. This would represent growth of about 9.3% from the $6.861 billion witnessed in the year-ago period. In the previous quarter, Microsoft reported growth of 8.5% in this unit. Expect Azure to continue to be a key growth catalyst for the segment.

Microsoft's acquisition of Avere Systems, a start-up specializing in data storage systems, will help strengthen and increase the use of its Azure public cloud. The company's cloud services are a major contributor to its revenue stream. Per the company's first-quarter fiscal 2018 results, server product and cloud services revenues went up 17% year over year, with Azure revenues soaring 89%.

Microsoft is also gaining from its increasing traction in blockchain technology. Its collaboration with Bank Hapoalim for the use of blockchain technology for digital bank guarantees is aiding Azure to penetrate the cloud market.

Adoption remains strong as evident from the growing customer base. Azure has been selected by the likes of Costco, Symantec, Bank of America Corporation, TD Bank and Sumitomo Mitsui Banking Corporation.

Data center expansion continues with Azure now in 42 regions globally, more than any other cloud provider.

The company’s More Personal Computing unit currently sits at $12.012 billion, which would represent modest year-over-year growth of 1.60%. This segment has struggled recently, primarily due to the aforementioned slump in global PC demand. But the estimate is calling for an improvement from the 0.9% growth rate Microsoft witnessed last quarter, which could mean that the company saw a strong holiday shopping period.

As well, strong Office 365 and Windows 10 adoption are other growth drivers. The launch of a plethora of products - Microsoft Teams in Office 365 for Education, Microsoft 365, Microsoft Relationship Sales solution and ISV Cloud Embed - is anticipated to drive installed base. Moreover, Microsoft continues to add features to Windows 10 that makes it more attractive for consumers as well as enterprises.

Recently, the company released updates for Windows to prevent malware attacks from exploiting Meltdown Vulnerability in Intel x86-64 processors. This software update is part of a series of updates that will shield against the newly discovered processor bug in Intel, AMD and ARM chipsets.

Microsoft is also one of the largest providers of gaming hardware.

The acquisition of AltspaceVR and launch of mixed reality headsets are evidence of its advancements in the fields of virtual reality and augmented reality. Moreover, strategic partnerships with Amazon Inc's AMZN Alexa and Red Hat are positives for the company's growth prospects.

Analysts and Hedge Funds Opinions

Microsoft had its price objective boosted by JPMorgan Chase & Co. from $78.00 to $87.00 in a research note issued to investors on Thursday morning. JPMorgan Chase & Co. currently has a neutral rating on the software giant’s stock. The analysts noted that the move was a valuation call.

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

  • Canaccord Genuity restated a buy rating and issued a $94.00 target price (up previously from $86.00) on shares of Microsoft in a research report on Friday, October 27th.
  • Barclays set a $95.00 target price on Microsoft and gave the company an overweight rating in a research report on Friday, January 12th.
  • ValuEngine upgraded Microsoft from a hold rating to a buy rating in a research report on Sunday, December 31st.
  • Oppenheimer raised their price objective on shares of Microsoft to $115.00 and gave the company an outperform rating in a research note on Tuesday, January 9th.
  • Finally, UBS Group set a $105.00 target price on Microsoft and gave the company a buy rating in a research report on Thursday, November 9th.

Two research analysts have rated the stock with a sell rating, nine have given a hold rating and twenty-nine have given a buy rating to the company’s stock. The company presently has a consensus rating of Buy and a consensus price target of $99.22.

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

  • One Capital Management LLC boosted its stake in shares of Microsoft by 5.0% in the second quarter. One Capital Management LLC now owns 56,671 shares of the software giant’s stock valued at $3,906,000 after buying an additional 2,675 shares in the last quarter.
  • JLB & Associates Inc. purchased a new stake in shares of Microsoft in the second quarter valued at approximately $10,873,000.
  • Finally, First National Bank Sioux Falls boosted its stake in shares of Microsoft by 9.6% in the second quarter. First National Bank Sioux Falls now owns 15,629 shares of the software giant’s stock valued at $1,078,000 after buying an additional 1,365 shares in the last quarter.

Harvey’s Options Volatility Indicator

Summary

It's safe to say CEO Satya Nadella's transformation efforts are paying off in a big way. Microsoft absolutely crushed 2017 and is picking up right where it left off so far this year. Microsoft stock hit an all-time high on January 23.

But even with its stellar run, the basis for so much bullishness is warranted, which bodes well for the up-coming report. Microsoft's cloud sales get much of the attention, and for good reason. However, the really good news is that cloud-related sales won't be the only growth driver in the months and years ahead.

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

** OPTION TRADE: Buy the MSFT MARCH 16 2018 97.500 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

Option Trade - Alibaba Group Holding Ltd (NYSE:BABA) Calls

Monday, January 29, 2018

** OPTION TRADE: Buy the BABA MARCH 16 2018 220.000 CALL at approximately $5.40. Place a pre-determined sell at $10.80.

Also include a protective stop loss of $2.15.

The Chinese e-commerce goliath Alibaba Group Holding Ltd (NYSE:BABA), an online and mobile commerce company, will report earnings on Thursday, February 01, 2018, before the market opens. The consensus earnings estimate is $1.65 per share on revenue of $12.00 billion and the Earnings Whisper number is $1.74 per share. Consensus estimates are for year-over-year earnings growth of 20.44% with revenue increasing by 56.47%.

Stock analysts at Oppenheimer boosted their FY2018 EPS estimates for shares of Alibaba Group in a note issued to investors on Wednesday. Oppenheimer analyst J. Helfstein now expects that the specialty retailer will earn $4.51 per share for the year, up from their prior forecast of $4.34. Oppenheimer currently has a “Buy” rating and a $220.00 target price on the stock. Oppenheimer also issued estimates for Alibaba Group’s Q4 2018 earnings at $0.97 EPS.

In the second quarter, Alibaba's core commerce business saw revenues increase by 63% year-over-year to $7 billion or approximately 83% of its overall revenue. In Q2 2018, Alibaba generated $433 million in international commerce retail revenue, a 115% increase from the same quarter a year earlier.

Alibaba had $447 million in cloud computing revenue in Q2 2018 with a small operating loss. If Alibaba could narrow that deficit to about four times the revenue while turning a profit, that too would make a big difference to Alibaba's stock price.

Alibaba continued to deliver significant growth in 2017, and overall earnings estimates have been revised higher since the company's last earnings release.

Wall Street analysts are lifting their price targets on Alibaba. China Renaissance analyst Ella Ji is exceedingly confident on the Chinese e-commerce giant ahead of its print. The analyst raised her price target on BABA to $230 (from $200), while reiterating a Buy rating on the stock.

Ji commented, “We expect a robust top line, but weaker y/y margin performance. Investment and exploration of new retail models should continue to overhang its 2018 margins, together with drags from Cainiao and elevated traffic acquisition cost and content cost. Yet, we stay positive on BABA’s performance in the long-term, expecting 1) there will be stronger monetization opportunities once its investment in new retail is ready for scalable franchise models, and 2) the consolidation of Cainiao potentially creates another layer of value to merchants on BABA’s platform. Our financial forecasts are also updated to reflect Cainiao’s consolidation, healthy revenue expectation, FX, and conservatism on margins.”

Alibaba Group has a 52-week low of $100.02 and a 52-week high of $205.23. The company has a debt-to-equity ratio of 0.21, a current ratio of 1.71 and a quick ratio of 1.71. The firm has a market cap of $525,600.00, a P/E ratio of 55.17, a price-to-earnings-growth ratio of 1.49 and a beta of 2.52.

Influencing Factors

Alibaba was up 95% in the 2017; which is quite impressive given that BABA stock has a $500 billion market cap behind it.

Alibaba stock outperformed its U.S.-based competitors Amazon.com, Inc. (NASDAQ: AMZN ) and Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ), by 33% and more than 50% respectively, in the past 12 months. And it's significantly cheaper than AMZN stock and only slightly more expensive than GOOGL stock using its price-to-earnings ratio as a yardstick.

What's even more impressive is the fact that BABA stock isn't finished growing as yet. As a matter of fact, CEO Jack Ma expects revenue growth to exceed 45% in 2018.

Alibaba stock isn't 'like' any other U.S. online firm. It is more diversified than AMZN and GOOGL. Not only does Alibaba have cloud computing, it's also an online platform for retailers and runs a distribution network and has a significant presence in mobile media.

As well, it's the biggest and the best of class in China. That is a big deal because it means it has got to this point with the Chinese government's approval. You can't expect to build a business in China, especially on this scale without the government's approval.

Also, China is an enormous market with far more potential organic growth than the U.S. and Europe, Alibaba stock isn't stopping at its border.

Alibaba is a big company that knows how to think small to make it big – such as the UC Browser that's lighter and better suited for cheaper phones and less reliable connectivity. It already has 430 million global users and that will grow for many years to come.

And now, Alibaba recently reported that the company began talking to Kroger Co (NYSE: KR ), the biggest grocer in the U.S. by revenue. This would be an incredible opportunity for BABA stock to enter the U.S. market, supporting KR efforts to build out an online operation that could take on AMZN and Wal-Mart Store Inc (NYSE: WMT ).

Analysts and Hedge Funds Opinions

Jefferies Group reaffirmed a “buy” rating and issued a $240.00 price target on shares of Alibaba Group in a research note on Tuesday.

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

  • Nomura reaffirmed a “buy” rating and issued a $219.00 price target (down from $221.00) on shares of Alibaba Group in a research note on Tuesday, January 9th.
  • Oppenheimer reiterated a “buy” rating and issued a $220.00 price target on shares of Alibaba Group in a report on Wednesday.
  • Finally, BidaskClub upgraded shares of Alibaba Group from a “hold” rating to a “buy” rating in a report on Thursday, November 2nd.

Alibaba Group has earned a consensus recommendation of “Buy” from the thirty-nine analysts that are currently covering the company. One analyst has rated the stock with a sell recommendation, two have given a hold recommendation, thirty-two have assigned a buy recommendation and two have issued a strong buy recommendation on the company. The average price target among brokers that have issued ratings on the stock in the last year is $217.15.

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

  • First Manhattan Co. increased its position in shares of Alibaba by 19.2% during the fourth quarter. The fund owned 11,883 shares of the specialty retailer’s stock after acquiring an additional 1,913 shares during the quarter. First Manhattan Co.’s holdings in Alibaba Group were worth $2,048,000 as of its most recent filing with the SEC.
  • Hillhouse Capital Management Ltd. boosted its position in Alibaba Group by 38,449.4% during the second quarter. Hillhouse Capital Management Ltd. now owns 3,570,449 shares of the specialty retailer’s stock worth $503,076,000 after acquiring an additional 3,561,187 shares during the last quarter.
  • Boussard & Gavaudan Investment Management LLP boosted its holdings in shares of Alibaba Group by 37.1% in the 3rd quarter. Boussard & Gavaudan Investment Management LLP now owns 11,598,897 shares of the specialty retailer’s stock valued at $1,986,697,000 after purchasing an additional 3,141,790 shares during the last quarter.
  • Finally, Third Point LLC boosted its holdings in shares of Alibaba Group by 46.7% in the 3rd quarter. Third Point LLC now owns 6,600,000 shares of the specialty retailer’s stock valued at $1,139,886,000 after purchasing an additional 2,100,000 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

BABA has a Strong Buy analyst consensus rating with 16 back-to-back buy ratings in the last three months. Meanwhile the average analyst price target of $217.15 suggests the stock still has upside potential of just over 9% from the current share price.

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

** OPTION TRADE: Buy the BABA MARCH 16 2018 220.000 CALL at approximately $5.40. Place a pre-determined sell at $10.80.

Also include a protective stop loss of $2.15.

 

Option Trade - QUALCOMM, Inc. (NASDAQ:QCOM) Puts

Monday, January 29, 2018

** OPTION TRADE: Buy the QCOM MARCH 16 2018 62.500 PUT at approximately $1.10. Place a pre-determined sell at $2.20.

Also include a protective stop loss of $0.45.

QUALCOMM, Inc. (NASDAQ:QCOM), U.S. mobile chipset giant, continues to see its’ woes increase by the month, and this is likely to be shown when it reports for the fiscal Quarter ending Dec 2017, after the market closes on Wednesday, January 31st. Based on 6 analysts' forecasts, the consensus EPS forecast for the quarter is $0.77. The reported EPS for the same quarter last year was $1.06.

It is also expected that QUALCOMM will announce $5.95 billion in sales for the current fiscal quarter. The lowest sales estimate is $5.80 billion and the highest is $6.11 billion. QUALCOMM reported sales of $6.00 billion in the same quarter last year, which indicates a negative year-over-year growth rate of 0.8%.

QUALCOMM has a market cap of $102,690.00, a PE ratio of 41.53, a PEG ratio of 1.93 and a beta of 1.39. QUALCOMM, Inc. has a 1-year low of $48.92 and a 1-year high of $69.28.

Influencing Factors

QUALCOMM has many problematic issues that it is trying to deal with –

  • QCOM is in a dispute with Apple Inc. (NASDAQ: AAPL) over royalty payments, with reports that Qualcomm chips may be removed from both the iPhone and iPad.
  • The planned acquisition of NXP Semiconductors NV (NASDAQ: NXPI) has stalled out. Activist firm Elliot Advisors is arguing that NXPI is worth at least $135 per share, not the $110 Qualcomm offered.
  • Regulators continue to target Qualcomm's operating model. The EU fined the company $1.2 billion this week.
  • And, of course, Broadcom Ltd (NASDAQ: AVGO) has launched a hostile takeover, offering $70 per share for Qualcomm stock.

Analysts and Hedge Funds Opinions

ValuEngine lowered shares of QUALCOMM from a “buy” rating to a “hold” rating in a report on Tuesday, January 16th.

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

  • Sanford C. Bernstein reaffirmed a “hold” rating on shares of QUALCOMM in a research note on Monday, November 13th.
  • Stifel Nicolaus downgraded shares of QUALCOMM from a “buy” rating to a “hold” rating and upped their price target for the company from $65.00 to $75.00 in a research note on Tuesday, November 28th.
  • Finally, UBS Group lowered their target price on shares of QUALCOMM from $58.00 to $53.00 and set a “buy” rating for the company in a report on Monday, November 6th.

Eighteen analysts have rated the stock with a hold rating and twelve have assigned a buy rating to the company’s stock. The company has an average rating of “Hold” and a consensus target price of $67.37.

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

  • Wesbanco Bank Inc. decreased its stake in shares of QUALCOMM by 10.2% during the third quarter. The firm owned 14,503 shares of the wireless technology company’s stock after selling 1,640 shares during the period. Wesbanco Bank Inc.’s holdings in QUALCOMM were worth $752,000 at the end of the most recent reporting period.
  • Welch & Forbes LLC lowered its stake in shares of QUALCOMM by 8.0% during the 3rd quarter. The firm owned 194,399 shares of the wireless technology company’s stock after selling 16,983 shares during the period.

Insider news……

  • EVP Alexander H. Rogers sold 919 shares of the stock in a transaction dated Wednesday, December 27th. The shares were sold at an average price of $64.32, for a total transaction of $59,110.08.
  • Also, EVP Matthew S. Grob sold 43,000 shares of the stock in a transaction dated Tuesday, January 9th. The stock was sold at an average price of $65.35, for a total transaction of $2,810,050.00.

Over the last 90 days, insiders sold 72,633 shares of company stock worth $4,659,677.

Harvey’s Options Volatility Indicator

Summary

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

** OPTION TRADE: Buy the QCOM MARCH 16 2018 62.500 PUT at approximately $1.10. Place a pre-determined sell at $2.20.

Also include a protective stop loss of $0.45.