“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, February 19, 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 - Boston Beer Company Inc. (NYSE:SAM) Calls

Wednesday, February 21, 2018

** OPTION TRADE: Buy the SAM MARCH 16 2018 210.000 CALL at approximately $2.50. Place a pre-determined sell at $5.00.

Also include a protective stop loss of $1.00.

Boston Beer Company Inc. (NYSE:SAM), an American brewer of craft-style beers, including its flagship Samuel Adams Boston Lager and the Angry Orchard line of hard ciders, is scheduled to release its latest quarterly report after the market closes today, February 21. Analysts expect Boston Beer to post earnings of $0.82 per share for the quarter.

It is expected that The Boston Beer Company will beat expectations when it reports as, in the preceding quarter SAM delivered a positive earnings surprise of 51.1%.

Wall Street expects full-year 2017 earnings of between $5.60 and $6.20 per share, down from $6.79 per share a year ago—in line with guidance the company gave in October, when it pointed investors toward that range but also said results “could vary significantly.”

A look at the company's earnings trend shows that Boston Beer has delivered a positive earnings surprise in the trailing four quarters, with an average beat of 63.4%.

Boston Beer Company is having a bull run lately owing to its robust cost-savings initiatives as well as lower tax rate. Moreover, its commitment toward three-point growth plan and long-term innovation remain encouraging. Consequently, shares of Boston Beer have rallied 26.7% in the past six months, outperforming the industry’s gain of 1.3%.

Boston Beer continues to offer new and exciting products and to expand its footprint within the craft beer industry. While challenges persist from a raft of craft brewers of various sizes, the company continues to benefit from the advantages of scale and incumbency, with access to robust distribution channels, large salesforce and healthy marketing budget.

It is important to recognize that, while known for its Sam Adams brand, Boston Beer is more than just a craft brewer. It produces a wide range of beverages, including hard ciders and teas, as well as fairly recent additions in the hard soda and seltzer markets. This diversification of product line further differentiates Boston Beer.

The current CEO, Martin Roper, said earlier this month he would leave; Dave Burwick, a longtime company director who was CEO of Peet’s Coffee, will step in.

Influencing Factors                                                            

Boston Beer is banking on its three-point growth-plan focused on the revival of Samuel Adams and Angry Orchard brands, cost-saving initiatives and long-term innovation to lift performance. The company's focus on pricing, packaging and product innovation, along with brand development, are also likely to boost its operational performance and market position.

  • Firstly, this plan prioritizes the revival of the Samuel Adams and Angry Orchard brands via packaging, innovation, promotion and brand communication initiatives. Moving ahead, the company plans to launch new media campaigns for these brands.
  • Secondly, it deals with cost savings and efficiency projects. In fact, the company ensures that these savings are directed toward further brand development. In third-quarter 2017, the company witnessed improved gross margin and lower operating expenses owing to this cost savings project. Additionally, Boston Beer continues to anticipate improving gross margin by one percentage point every year through 2019.
  • Finally, the plan emphasizes on long-term innovation wherein Boston Beer focuses on maintaining the leadership of its Truly Spiked & Sparkling brand and ensures that it reaches full potential.

The company's brand-building efforts and initiatives to add new products remain key revenue drivers. Boston Beer strongly believes in reinvesting its profits toward capital expenditures than distributing the same to shareholders. The company has always been seeking strategic opportunities to expand its business through inorganic means, which will certainly help it capture considerable market share from rivals.

Given the sturdy results in the preceding quarter, the company raised the lower-end of its previously stated earnings guidance range for fourth-quarter 2017. Boston Beer now anticipates its adjusted earnings per share in the band of $5.60 to $6.20, compared with $5.00 to $6.20 projected earlier.

Boston Beer strongly believes in reinvesting its profits toward capital expenditures rather than distributing the same to its shareholders. In this regard, it has made significant investments toward acquiring brewing assets, enhancing research & development (R&D) as well as packaging and marketing of products. While Boston Beer is always seeking strategic opportunities to expand its business through inorganic means, this will certainly help it capture considerable market share from rivals.

Boston Beer portrays a spectacular surprise trend with earnings beat for the fourth straight quarter while sales topped estimates for the second consecutive quarter. Results gained from gross margin improvement, lower operating costs owing to the company's cost-saving initiatives as well as lower tax rate. Moreover, the company's brand-building efforts and initiatives to add new products remain key revenue drivers.

Boston Beer's balance sheet is enviable. Total revenue continued its upward trajectory, hitting almost $1 billion in 2016 and gaining in 2017. Gross profit came in at $460 million in 2016, showing the company can produce strong growth without overspending. The main expenditure comes from selling, general and administrative expenses, particularly sales and marketing expenses involved in expanding and pushing the brand.

Virtually every indicator is positive for Boston Beer. Earnings before interest and taxes (EBIT) stood at $137 million at the end of fiscal year 2016, and continued to grow in 2017. Net income is positive, assets and equity are strong and expenses are relatively light. As a purely financial matter, Boston Beer is in great shape.

Analysts and Hedge Funds Opinions

Zacks Investment Research upgraded shares of Boston Beer from a hold rating to a strong-buy rating in a research note published on Thursday, January 11th. They currently have $221.00 price target on the stock.

According to Zacks, “Boston Beer, which has outperformed the industry in last three months, posted solid third-quarter 2017 with both earnings and sales surpassing estimates. While this was the company’s fourth-straight earnings beat, sales topped estimates for the second-consecutive quarter. Earnings gained from enhanced gross margin and lower operating costs owing to cost saving initiatives. We remain encouraged by Boston Beer’s three-point growth plan focused on revival of Samuel Adams and Angry Orchard brands, cost-saving initiatives and long-term innovation. The company's focus on pricing, product innovation and brand development are also likely to boost operational performance and market position. Moreover, the company’s brand-building efforts and initiatives to add new products remain key revenue drivers. However, results continue to be hurt by soft depletion trends owing to weakness in Samuel Adams, soft craft beer and cider categories.”

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

  • Stifel Nicolaus began coverage on shares of Boston Beer in a research note on Tuesday, December 5th. They set a “hold” rating and a $166.00 price objective for the company.
  • Credit Suisse Group increased their target price on shares of Boston Beer from $151.00 to $160.00 and gave the stock a “neutral” rating in a research report on Friday, October 27th.
  • Macquarie upgraded shares of Boston Beer from an “underperform” rating to a “neutral” rating and set a $140.00 price target on the stock in a report on Thursday, February 8th.
  • BMO Capital Markets initiated coverage on shares of Boston Beer in a report on Monday, February 5th. They set a “market perform” rating and a $180.00 price target on the stock.
  • Jefferies Group reaffirmed a “hold” rating and issued a $175.00 price objective on shares of Boston Beer in a research report on Thursday, January 4th.
  • Finally, Berenberg Bank raised shares of Boston Beer from a “sell” rating to a “hold” rating in a research report on Monday, December 18th.

Two investment analysts have rated the stock with a sell rating, eleven have assigned a hold rating and one has assigned a strong buy rating to the stock. Boston Beer has a consensus rating of “Hold” and a consensus target price of $160.33.

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

  • Robeco Institutional Asset Management B.V. grew its holdings in Boston Beer by 21.4% in the 4th quarter. The firm owned 25,493 shares of the company’s stock after purchasing an additional 4,494 shares during the quarter. Robeco Institutional Asset Management B.V. owned 0.22% of Boston Beer worth $4,873,000 at the end of the most recent reporting period.
  • Northern Trust Corp lifted its position in shares of Boston Beer by 1.9% during the 2nd quarter. Northern Trust Corp now owns 149,976 shares of the company’s stock worth $19,819,000 after purchasing an additional 2,852 shares during the last quarter.
  • Finally, Vanguard Group Inc. lifted its position in shares of Boston Beer by 2.0% during the 2nd quarter. Vanguard Group Inc. now owns 748,951 shares of the company’s stock worth $98,974,000 after purchasing an additional 14,951 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

The company hopes to revive things this year. Its plan includes a new Sam Adams beer (and the national rollout of another) and an Angry Orchard Rosé. And it has pointed investors toward a low-single digit increase in depletions for 2018.

The maker of popular Sam Adams beverage products, Boston Beer is a leader in America's beer market. It holds a robust position in the marketplace with a widespread distribution network nationwide and many production locations. Further, the brewer sits in a strong place financially, with robust earnings. Given all of this, the company looks well-positioned to improve its standing as well as to expand the boundaries of the craft beer marketplace.

Boston Beer has a 12-month low of $128.70 and a 12-month high of $202.35. The company has a market cap of $2,360.23, a P/E ratio of 27.38, a PEG ratio of 5.73 and a beta of 0.53.


Option Trade - Continental Resources, Inc. (NYSE:CLR) Calls

Tuesday, February 20, 2018

** OPTION TRADE: Buy the CLR APRIL 20 2018 55.000 CALL at approximately $2.55. Place a pre-determined sell at $5.00.

Also include a protective stop loss of $1.00.

Oklahoma City-based Continental Resources, Inc. (NYSE:CLR), that explores for, develops, and produces crude oil and natural gas properties, will report earnings for the fiscal Quarter ending Dec 2017 after the market closes tomorrow, Wednesday February 21, 2018. Analysts expect Continental to swing to a profit of 28 cents per share vs. a loss of 7 cents per share in the year-ago quarter. Revenue is seen climbing 70% to $935 million.

Continental Resources Inc.'s oil and natural gas production surged 37 percent in the fourth quarter of 2017 and is likely to grow again in 2018, the company said Thursday.

Analysts at B. Riley upped their Q2 2018 earnings estimates for Continental Resources in a report released last Friday. B. Riley analyst R. Rashid now expects that the oil and natural gas company will earn $0.62 per share for the quarter, up from their prior forecast of $0.50. B. Riley currently has a “Buy” rating and a $78.00 target price on the stock.

And investment analysts at KeyCorp raised their FY2017 EPS estimates for Continental Resources in a report released last Thursday. KeyCorp analyst D. Deckelbaum now expects that the oil and natural gas company will earn $0.46 per share for the year, up from their prior estimate of $0.39. KeyCorp currently has a “Hold” rating on the stock. KeyCorp also issued estimates for Continental Resources’ Q4 2017 earnings at $0.36 EPS.

And as well, research analysts at Jefferies Group lifted their Q2 2018 earnings per share estimates for shares of Continental Resources in a note issued to investors last Tuesday. Jefferies Group analyst M. Hsu now forecasts that the oil and natural gas company will post earnings per share of $0.54 for the quarter, up from their prior estimate of $0.40. Jefferies Group currently has a “Buy” rating and a $68.00 target price on the stock. Jefferies Group also issued estimates for Continental Resources’ Q3 2018 earnings at $0.65 EPS, Q4 2018 earnings at $0.62 EPS, FY2018 earnings at $2.28 EPS, Q1 2019 earnings at $0.59 EPS, Q2 2019 earnings at $0.61 EPS, Q3 2019 earnings at $0.67 EPS, Q4 2019 earnings at $0.70 EPS and FY2019 earnings at $2.57 EPS.

The Oklahoma City company announced its preliminary 2017 results and 2018 budget Thursday, six days before it is scheduled to release its full 2017 earnings report.

Continental executives said they plan to spend about $2.3 billion in capital expenditures in 2018. They said in November they were on pace to spend about $1.95 billion in 2017. The increased 2018 drilling budget is fueled by free cash flow growth as the company will continue to operate within cash flow levels, CEO Harold Hamm said in a statement Thursday.

"This year Continental expects to set itself apart by generating up to $900 million of free cash flow while delivering top-tier production growth," Hamm said. "We plan to use the majority of this excess cash to continue paying down debt, further strengthening our balance sheet and increasing shareholder value."

Hamm said the company expects a return on capital of 10 to 15 percent, assuming an average oil price of $60 a barrel and a natural gas price of $3 per thousand cubic feet. A $5 per barrel change in the average price of oil prices would affect annual cash flow by $250 million to $300 million, and a 10 cent change in the natural gas price would affect cash flow by $5 million to $10 million, the company said.

Influencing Factors

CLR consistently outperforms the market - the results are quite impressive. The company has beaten out the industry at large over the past 12 weeks by a margin of 49% to 7.3% while it has also outperformed when looking at the past year, putting up a gain of 4.9% -clearly, CLR is riding a bit of a hot streak.

Over the past month, the full year earnings estimate for CLR has risen by 17.2%; with four estimates going higher for Continental Resources while none have gone lower in the same time period. On its own this is impressive, but considers that it also beats the industry average of 10% too. The trend is undeniably in Continental Resources' favor right now, and it suggests that the momentum might be long lasting for this stock. 

Also, over the past two months, 11 earnings estimates have gone higher compared to one lower for the full year, while 11 estimates have moved upwards with one downward revision for the next year time frame too. These revisions have helped to boost the consensus estimate as two months ago CLR was expected to post earnings of 23 cents per share for the full year, though today it looks to have EPS of 34 cents for the full year now, representing a solid increase.

As well, Continental Resources reported preliminary 2017 Revenues & 2018 Capital Budget in the past few days.

2017 Preliminary Results:

  • Production of 286,985 barrels of oil equivalent (Boe) per day in fourth quarter 2017, up 37% year-over-year from fourth quarter 2016
  • Oil represented 59% of production in fourth quarter 2017, compared to 55% in fourth quarter 2016
  • Production of 242,637 Boe per day for full-year 2017, up 12% from full-year 2016
  • Lowered debt by $261 million in fourth quarter 2017 and by an additional $95 million in January 2018

2018 Projected Capital Budget and Guidance:

  • $2.3 billion capital expenditures
  • Estimate $3.0 to $3.2 billion of cash flow from operations and $800 to $900 million of free cash flow (non-GAAP) at $60 per barrel WTI and $3.00 per Mcf Henry Hub
  • Budget expected to be cash neutral in the low-to-mid-$40's WTI
  • 17% to 24% year-over-year production growth to 285,000 to 300,000 Boe per day
  • 10% to 15% projected return on capital employed (ROCE)

Continued Improvement in 2018 Differentials and Operating Expenses Expected:

  • ($3.50) to ($4.50) per Bo oil differential
  • $0.00 to +$0.50 per Mcf natural gas premium
  • $3.00 to $3.50 per Boe production expense
  • $1.70 to $2.30 per Boe total G&A

Continental is expected to use six rigs to drill 142 wells in North Dakota's Bakken Shale and 15 rigs to drill 118 wells in Oklahoma's SCOOP and STACK fields in 2018.

Analysts and Hedge Funds Opinions

Robert W. Baird set a $60.00 price objective on Continental Resources in a research report published last Thursday morning. The firm currently has a buy rating on the oil and natural gas company’s stock.

Also, Continental Resources has been given a $65.00 price target by equities researchers at Credit Suisse Group in a note issued to investors on Tuesday, January 23rd. The brokerage presently has a “buy” rating on the oil and natural gas company’s stock. Credit Suisse Group’s price target points to a potential upside of 21.88% from the company’s previous close. The analysts noted that the move was a valuation call.

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

  • Morgan Stanley raised their target price on shares of Continental Resources from $51.00 to $56.00 and gave the stock an overweight rating in a research report on Wednesday, November 8th.
  • Royal Bank of Canada restated a buy rating and set a $52.00 target price on shares of Continental Resources in a research report on Wednesday, December 20th.
  • Stifel Nicolaus restated a buy rating and set a $69.00 target price (down from $71.00) on shares of Continental Resources in a research report last Friday.
  • Barclays reissued an “overweight” rating and issued a $58.00 price target (up from $53.00) on shares of Continental Resources in a research report on Thursday, January 11th.
  • Finally, Credit Suisse Group initiated coverage on shares of Continental Resources in a research report on Monday, December 11th. They issued an “outperform” rating and a $57.00 price target for the company.

Nine research analysts have rated the stock with a hold rating, nineteen have issued a buy rating and one has given a strong buy rating to the company. Continental Resources presently has an average rating of Buy and an average price target of $67.79.

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

  • Element Capital Management LLC acquired a new stake in Continental Resources in the fourth quarter valued at $17,509,000.
  • LPL Financial LLC lifted its holdings in Continental Resources by 166.4% in the fourth quarter. LPL Financial LLC now owns 30,062 shares of the oil and natural gas company’s stock valued at $1,592,000 after acquiring an additional 18,777 shares during the period.
  • Hartree Partners LP increased its position in shares of Continental Resources by 160.0% in the fourth quarter. Hartree Partners LP now owns 130,000 shares of the oil and natural gas company’s stock valued at $6,886,000 after buying an additional 80,000 shares in the last quarter.
  • Ninepoint Partners LP purchased a new position in Continental Resources in the 3rd quarter worth about $7,896,000.
  • Finally, Wells Fargo & Company MN increased its stake in Continental Resources by 40.5% in the 3rd quarter. Wells Fargo & Company MN now owns 568,536 shares of the oil and natural gas company’s stock worth $21,951,000 after buying an additional 163,935 shares during the period.

Harvey’s Options Volatility Indicator

Summary

For 2019, the Company currently expects production to grow 15% to 20% year over year with a capital budget of $2.5 to $2.8 billion, while generating significant free cash flow comparable to 2018 projections.

Continental Resources has a current ratio of 0.94, a quick ratio of 0.85 and a debt-to-equity ratio of 1.55. The stock has a market cap of $20,010.00, a P/E ratio of -761.86 and a beta of 1.36. Continental Resources has a 1 year low of $29.08 and a 1 year high of $58.89.







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