“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, April 13, 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 – Apple Inc. (NASDAQ:AAPL) Calls

Friday, April 17, 2020

** OPTION TRADE: Buy AAPL JUN 19 2020 310.000 CALL at approximately $6.60. (BID price at this time is $6.60 – ASK is $8.00)

Place a pre-determined sell at $13.20.

Also include a protective stop loss of $2.75.

Preamble.....

Shares of tech heavyweight Apple Inc. (NASDAQ: AAPL), a company that designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications, rallied 0.8% Thursday to close at 286.69, as the stock continues to move up.

After a brutal sell-off in late February and March, stocks have rebounded nicely over the past few days as signs of the eventual recovery from this crisis are apparent. It appears that the worst of the outbreak may be over with slowing infection rates.

Apple is a tech name with an attractive valuation and strong secular theme. It is believed that  the pandemic will accelerate the move to the cloud and exacerbate the need for cybersecurity.

And, Apple L is best positioned to win from the 5G super cycle theme.

Factors…..

The company recently launched new iPad and MacBook. Solid adoption of Apple Watch and AirPod are expected to drive its top line. However, it doesn’t expect to achieve its second-quarter revenue guidance due to supply chain disruption amid the coronavirus outbreak, which is expected to hurt iPhone sales.

Data from the Chinese government also showed a strong rebound in iPhone sales in China, as that country has made significant progress in containing the virus.

Apple shipped an estimated 2.5 million iPhones in China, up from the roughly 500,000 units that the company sold in February. While those volumes are still down approximately 20% from March 2019, the significant improvement from February is giving hope that the economy will have a V-shaped recovery.

The Mac maker has also been trying to help mitigate the impact of COVID-19 in various ways, announcing that it was releasing anonymized mobility data reports that can help inform local governments and public health officials.

Apple and Google also recently announced a new partnership to collaborate on contact-tracing technology. The tech companies plan to release a Bluetooth-based contact-tracing platform "in the coming months." Contact tracing is one of the most important tools in tracking the spread of outbreaks.

Apple Inc said on Thursday it would reopen its sole retail store in South Korea on April 18, marking it the first site to return to business after it closed all stores outside Greater China last month due to the coronavirus outbreak.

The iPhone maker reopened all 42 of its branded stores in China in March, more than a month after they were shut in the wake of the pandemic.

"A focus for the store will be service and support at the Genius Bar," the company said.

"For customers who want to make a purchase, we have several options including ordering online for delivery or pick up in store."

The company plans to release up to four redesigned iPhones later this year with 5G networking and is preparing to introduce a virtual-reality headset in 2021 or 2022.

It’s also working on its own main processors for Mac computers, light-weight augmented-reality glasses and self-driving car technology.

Earnings…..

Apple is scheduled to announce its next earnings results on Tuesday, May 5th.

Equities analysts predict that Apple will post sales of $55.20 billion for the current fiscal quarter. Apple posted sales of $58.02 billion in the same quarter last year, which suggests a negative year-over-year growth rate of 4.9%.

Brokerages expect that Apple will report earnings per share (EPS) of $2.21 for the current fiscal quarter. Apple reported earnings per share of $2.46 in the same quarter last year, which would suggest a negative year-over-year growth rate of 10.2%.

Analysts Thoughts.....

Deutsche Bank analysts raised their share-price target for Apple amid optimism about the new iPhoneSE.

“Overall, we are positive on the iPhone SE released and see a larger [total available market] for the product than in 2016,” the analysts, led by Jeriel Ong, wrote in a report.

The phone is priced at $399, $499 or $599, depending on the version. It was introduced Wednesday.

The new phone could counteract the weakness in iPhone sales stemming from Apple Store closures that resulted from the coronavirus, the analysts said.

The SE also can “help bridge the gap to the summer, when iPhones could resume a more normalized demand outlook as major Western economies consider a reopening plan,” they wrote.

Meanwhile, J.P. Morgan analysts estimate Apple will build 9 million units of the SEs in the second quarter and 20 million for the year as a whole,

“Our full-year estimate is at the low end of the consensus of 20 million to 25 million, as we factored in the covid-19 impact,” the analysts, led by William Yang, wrote in a report.

When it comes to the iPhone12, the analysts predict production of 68 million in the second half of the year. 

“We reiterate our view that Apple still targets to sell the two 6.1-inch iPhones in late September, but a one- to two-month delay is more realistic for the 5.4-inch and the 6.7-inch new iPhones,” they said.

So…..

Apple’s shares have outperformed the S&P 500 over the past six months (+20.9% vs. -8%), with the analysts crediting steady momentum in the Services segment for this outperformance. This momentum is showing up in strong App Store sales and the robust adoption of Apple Music and Apple Pay.

On numerous occasions in recent years, CEO Tim Cook has said that he believes Apple's greatest contribution to mankind will be in improving people's health. Under normal circumstances, that pertains to Apple Watch and wearable technology, but the company is showing that it can also help during a public health crisis.

Cook called the pandemic an “uncertain and stressful moment,” but expressed confidence that the company will emerge strongly from the crisis, as it did after the 2008 recession and following a near-bankruptcy in the late 1990s.

He said that Apple “isn’t immune to worldwide economic trends,” but that it entered the coronavirus pandemic with a robust balance sheet and stressed that the company will keep investing in a “really significant way” in research and development and future products.

Apple’s 50-day moving average is $264.32 and its two-hundred day moving average is $274.07. The company has a debt-to-equity ratio of 1.04, a quick ratio of 1.56 and a current ratio of 1.60. Apple has a 52-week low of $170.27 and a 52-week high of $327.85. The firm has a market cap of $1,240.94 billion, a price-to-earnings ratio of 22.47, and a PEG ratio of 2.03 and a beta of 1.17.


Option Trade – Walt Disney Co (NYSE:DIS) Calls

Monday, April 13, 2020

** OPTION TRADE: Buy DIS SEP 18 2020 115.000 CALL at approximately $6.30. (BID price at this time is $6.30 – ASK is $7.10)

Place a pre-determined sell at $12.60.

Also include a protective stop loss of $2.55.

Preamble.....

The time seems to be right, when a good company gets into temporary trouble, to buy before it recovers to its normal.

The whole American economy is suffering at the moment. The COVID-19 pandemic has hit some industries very hard, but there are some great businesses selling for unbelievable values.

While no one knows when the bear market will end, there are a few quality companies offering incredibly good value right now. And again, Walt Disney Co (NYSE:DIS) provides us with another chance to profit from its pullback. We profited nicely last year when it rallied, and if you are a new member, now's your chance to get on board as Disney unveiled its new streaming services.

Walt Disney is one of the biggest brands in the world. It’s a leader in its industry, is a master of marketing, and has a multigenerational history of cultivating assets such as Disney princesses.

The Facts.....

Walt Disney owns some timeless entertainment franchises, but the Magic Kingdom is hurting right now as a result of COVID-19. All of Disney's theme parks around the world are currently closed, and Disney Studios has delayed its 2020 film slate until later in the year. The next few months will see Disney lose at least a few billion in revenue. Last year, the parks, experiences, and products segment brought in over $26 billion, with box office sales generating another $11 billion.

Health professionals in the U.S. believe we'll hit the peak of the curve in new cases of COVID-19 this month. There are also treatments and vaccines under development. Disney is already signaling that it expects movie theaters to be reopened this summer.

Disney's Mulan film was scheduled to release in March, but Disney has set a new release date for July 24. Disney World may also reopen this summer, since the Parks website is currently accepting reservations for June 1 or later, although this could change if the coronavirus is not under control by then.

Obviously, a prolonged outbreak would put Disney at risk of not being able to meet its financial obligations. The company had $48 billion of debt and $6.8 billion in cash at the end of December. It just recently issued another $6 billion in debt, which shores up its balance sheet with extra cash in the short term. But if parts of the economy start to reopen in the next few months, placing the economy on a recovery path, Disney stock is a bargain at current levels.

The shares look undervalued right now just based on the expected long-term performance of the media networks, parks, consumer products, and studios. Investors are basically getting Disney's ownership of Hulu, Disney+, and ESPN+ thrown in as a bonus, and that could become quite a big bonus over the next 10 years if these streaming services reach more than 100 million subscribers combined over time.

Disney+.....

The stock increased about 30% last year after management officially unveiled Disney+ in April 2019. Those gains have been wiped out over the last month. The stock is now selling for 15.5 times trailing-12-month earnings -- the same valuation it sported before Disney+ was announced and before the service attracted nearly 29 million new signups following its launch in November.

Disney+ surpassed 50 million subscribers this week, just 5 months after its launch. The number of Disney+ subscribers grew by more than 22 million in just 2 months. A lot of this can be attributed to its international expansion in late March.

The quarantines mandated across the globe are no doubt boosting subscription growth. Netflix was launched in 2007 and didn’t reach 50 million till 2014; granted Netflix was the streaming pioneer.

Netflix is still the clear video streaming king with 167 million paid subscribers, but Disney is hot in its tail. Netflix’s subscription growth is primarily international now, and Disney threatens its global expansion.

Disney also owns Hulu which has over 30 million paid subscribers and is anticipating a worldwide rollout in 2021.

Credit Agreement.....

Disney signed a new credit agreement with Citibank for as much as $5 billion on April 10.

The interest rate for borrowings under the agreement is based on the company’s public debt rating, and ranges between 0.875% and 1.500% for Eurocurrency Rate borrowings and 0.000% and 0.500% for Base Rate borrowings.

Disney also has the option to extend the maturity for an additional 364-day period from its April 9, 2021 maturity date, subject to lenders’ consent.

Analysts Thoughts.....

Analyst Alexia Quadrani at JPMorgan said she was “impressed by the surprise announcement” of the 50 million subscribers for Disney+. She said it was clear that the announcement made as Wall Street analysts have been cutting estimates for the company’s other businesses, such as amusement parks and studios.

She reiterated her overweight rating and her stock price target of $140, which is 34.0% above current levels.

“We view Disney+ as a core driver to the company’s extensive ecosystem of consumer touchpoints, which we believe will benefit the Parks and Studio once normal operations resume,” Quadrani wrote in a research note for clients. “Disney’s early success in transitioning its business to a digital platform will likely award the stock a higher multiple as it increases conviction in its longer-term success and path to profitability.”

Wedbush analyst Dan Ives also spoke to the “massive success” of Disney+: “To put these numbers in context, the company originally set a long-term target of getting 60 million to 90 million [subscribers] by 2024,” Ives wrote.

Rosenblatt's Bernie McTernan believes Disney “is well on its way to become a dominant global streaming player for the long-term.” The analyst reiterated a Buy rating on Disney shares along with a $140 price target. The figure implies potential upside of 34%.

McTernan said, “We believe this suggests 39M subscribers at the end of the March quarter, ~15% above consensus estimates and ~5% above RBLT estimates. Furthermore, these results suggest to us subscribers for the end of June could near 70M or 52M excluding India. Globally, this would be ~50% above consensus and RBLT estimates. However, excluding India (which we do not include in our estimates and assume consensus does not either), the 52M subscribers at the end of the June quarter would be ~18% above consensus and ~12% above RBLT estimates.”

Wall Street largely buys into what this media giant has to offer, as analytics reveal DIS as a Buy. Out of 23 analysts polled in the last 3 months, 17 are bullish on Disney stock while 6 remain sidelined. With a return potential of 30%, the stock’s consensus target price stands at $134.67.

So…..

Moody Ratings’ Neil Begley said that Disney has enough cash to weather the disruption. Disney has $12.25 billion of revolver capacity, presently undrawn except to backstop its outstanding commercial paper, and it has sizable cash balance. “We also expect the company will endeavor to control costs, delay capital expenditures and pay significantly lower taxes for fiscal 2020,” he wrote.