“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, February 17, 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 – Roku Inc. (NASDAQ: ROKU) Calls

Thursday, February 20, 2020

** OPTION TRADE: Buy the ROKU APR 17 2020 140.000 CALLS at approximately $6.50.

Place a high pre-determined sell at $13.00.

Include a protective stop loss of $2.60.

The Los Gatos, California-based TV streaming device giant Roku Inc. (NASDAQ: ROKU) presented earnings earlier this month which were below par! But the pullback of 6.3% on the day, and a little more since, provides bullish implications that the stock is ready to rebound.

Historically, Roku has had similar pullbacks in the past three years, which has resulted in an average 21-day gain of 12.1%.

Also, a volatility crush means the stock's near-term options are attractively priced at the moment.

Cord Cutting A Benefit To Roku…..

Roku predicts that within four years, half of all U.S. homes will have never had cable TV or will have canceled their subscription, the company said in a letter to investors last Thursday released along with the company’s fourth quarter 2019 results.

The consumer shift from expensive cable TV packages to cheaper and more flexible “over-the-top” internet streaming services has been driving a wave of investment and competition in the media industry.

Roku sees this proliferation boosting its business, which it frames as being a “neutral partner at the center of the streaming ecosystem.” It sells software and hardware that enables consumers to stream internet video on their televisions, as well as advertising services.

“Moreover, new services and the growing investment in original programming that is exclusive to streaming are enriching the [over the top] experience,” Roku said in the letter to investors. “This is driving more viewers to spend more time streaming and less time in traditional pay TV, and many consumers are leaving the legacy pay TV ecosystem entirely. We predict that by 2024 roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV.”

The Earnings In Brief.....

The company posted better-than-expected financials and engagement numbers, but its forecast was mixed. Roku’s management gave an upbeat view of revenue for the quarter and year ahead but indicated that spending efforts would continue to weigh on the bottom line, prompting a disappointing earnings forecast.

The yearly results for Roku were released last week. Revenues came in at US$1.1b, in line with forecasts and the company reported a statutory loss of US$0.52 per share, roughly in line with expectations.

Analysts are now forecasting revenues of US$1.61b in 2020. This would be a major 42% improvement in sales compared to the last 12 months. Losses are predicted to fall substantially, shrinking 150% (on a statutory basis) to US$1.30. Yet prior to the latest earnings, analysts had been forecasting revenues of US$1.56b and losses of US$0.41 per share in 2020.

Olivetree Financial tech sector strategist Dan Forman praised Roku's Thursday print for a 71% year-over-year gain in platform segment revenue, which was a record at nearly $260 million, and strong player segment revenue growth that also topped expectations. 

"The mix in the quarter was less robust than we would have liked, but we are nonetheless happy with the outcome in light of our view on what was 'priced' and see the DIS EU launch as the next catalyst to consider," Forman said in a Friday note, adding that Olivetree thinks the stock might target $170. 

Analysts’ Opinions.....

Needham analyst Laura Martin was encouraged by Roku’s disclosures on account growth and engagement. Roku added 4.6 million active accounts during the quarter, up 36% year over year, and said its users streamed more 11.7 billion hours of content in the period, up 60%. The growth figures “impl[ies] engagement is growing faster than new users, which should lower churn,” she wrote.

Martin rates the stock a buy with a $200 price target.

SunTrust Robinson Humphrey analyst Matthew Thornton had a lower-than-expected earnings outlook while maintaining his hold rating and $160 price target.

One of his concerns is that “competing platforms are offering more generous economics in an effort to woo TV [original equipment manufacturers],” which could put upward/downward pressure on Roku costs/margins.”

At least four analysts hiked their price targets on Roku shares following the report, and the average target now stands at $150.28. Analysts are mostly upbeat about Roku: Of the 19 analysts who cover the stock, 13 rate it a buy, three rate it a hold, and three rate it a sell.

Shares have added more than 180% over the past year, compared with a 23% rise for the S&P 500 in that span.

As a service that provides a way for viewers to watch content from other streamers rather than a focused content creator itself, Roku may be in a stronger place than other companies that actually have to produce the programming as the number of streaming services proliferates.

"They've had an incredible year and it looks like they’re continuing to build on that," said TD Ameritrade's Shawn Cruz.

"The benefit for them is, as the streaming pie gets larger, it benefits companies like Roku."

Summary.....                

Roku is a volatile stock in the past 12 months which provides the opportunity for this pull-back to be a great benefit moving forward.


Option Trade – Wal-Mart Stores Inc. (NYSE:WMT) Calls

Wednesday, February 19, 2020

** OPTION TRADE: Buy the WMT JUN 19 2020 120.000 CALLS at approximately $4.15.

Place a high pre-determined sell at $8.30.

Include a protective stop loss of $1.65.

Mega retailer Wal-Mart Stores Inc. (NYSE:WMT) reported earnings yesterday, before the market opened and “Earnings Prediction Members” were on-hand to benefit from this – up 95%.

However, there is plenty more profit to be made from Walmart’s move upwards.

Fourth-quarter earnings and revenue fell short, which Chief Executive Doug McMillon attributed to a variety of factors, including the shortened holiday shopping season, the shift to e-commerce and the lack of a hot toy.

“Walmart’s Q4 performance, which we characterize as tepid overall, indicates that the holiday season was if anything even more promotional than we anticipated, with its U.S. operating margin down around 75 basis points for the quarter, some of which was due to mix as lower margin food sales were strong while higher margin apparel was weak, some due to softness in key holiday categories such as toys, and some due to increased expenses around delivery,” said Charlie O’Shea, Moody’s lead Walmart analyst.

The Dow component Walmart rose back above its 50-day moving average despite the weak quarterly report. Earnings for the holiday period were weaker than expected and same-store sales also missed views. Walmart also gave disappointing profit guidance, yet shares rallied.

Walmart shares have now formed a base with a $125.48 buy point.

Time to execute an options call play!

The Earnings In Brief.....

Walmart’s adjusted earnings came in at $1.38 per share, falling short of the Consensus Estimate of $1.43.

Also, earnings dropped 2.1% year over year. This could be accountable to higher cost of sales as well as increased operating, selling, general and administrative expenses.

As well, the disruption in Chile and a legal matter affected the bottom line by around 5 cents.

Total revenues grew 2.1% to nearly $141.7 billion. The year-over-year upside was driven by growth in all segments. The Consensus Estimate was set at $142.4 billion.

Looking For A Trade On Walmart.....

After a bit of weakness early on in the day, the stock has stayed above its annual value level at $116.42.

The stock ended last week at $117.89, down 0.8% year to date and in bull-market territory 22% above its 52-week low of $96.53 set March 28, 2019. 

It’s 6% below its all-time intraday high of $125.38, set on November. 14.

“Overall, we think Walmart likely wasn’t immune from some of the near-term pressures like a shortened holiday season that impacted competitors such as Target during the holiday season,” wrote UBS analysts led by Michael Lasser.

“Still its early guidance leads us to believe that its current year-to-date performance in February has been strong and it’s well positioned to take further share.”

UBS rates Walmart stock neutral with a $125 price target.

Also, Jefferies analyst Christopher Mandeville rated Walmart stock as a buy with a $139 target heading into earnings.

"WMT's early investments in tech/ecommerce and practice of continued price investment, which benefits from the company's unmatched scale, have positioned it well for future share gains," he said in a Feb. 12 research note. "E-commerce initiatives, including expanding marketplace and additional delivery options should drive continued robust e-commerce growth; we are encouraged by WMT's testing of micro-fulfillment."

He also touted the firm's strategic investments in Flipkart, which he said opens access to the rapidly growing market in India. He believes it should yield a significant return in the future.

Summary.....                

In a quarter that’s all about boosting business by way of holiday shopping, it’s worth noting that Walmart’s e-commerce sales were up by 41% last quarter, more than the 35% in Q4.

Walmart remains "well-positioned" for 2020 and beyond after heavy investments in its supply chain and distribution, Strategic Resource Group managing director Burt Flickinger said.

Walmart's dominant market positioning remains unchanged.