“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, May 28, 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 – Alcoa Corp (NYSE:AA) Calls

Wednesday, May 30, 2018

** OPTION TRADE: Buy the AA JULY 20 2018 50.000 CALL at approximately $1.65 to $1.75. Place a pre-determined sell at $3.30.

Also include a protective stop loss of $0.65.

Aluminium manufacturer Alcoa Corp (NYSE:AA) has had a busy year. The stock is up 68% in the last year on various catalysts, although it's been anything but a smooth ride for shareholders.

However, AA has been a strong performer on the charts since the split from Arconic (ARNC) back in late 2016, more than doubling to its current share price. As well, the stock's recent pullback to a familiar trendline presents a buying opportunity.

China voluntarily took some of its smelting capacity offline over the winter in a new effort to combat air pollution, which provided a rare reprieve for international players such as Alcoa. But the extra breathing room wasn't without its own set of obstacles. Global trade tensions, sanctions on Russia's largest aluminum producer and the threat of tariffs have injected volatility -- both for better and for worse -- into aluminum prices.

Alcoa has transformed itself into a leaner and more efficient business. It exited March with over $1.2 billion in cash (what management says is the minimum cushion) and just $300 million in net debt. While a few accounting items led to a drop in net income compared to the prior-year period, the business still turned in a solid opening frame of 2018 thanks to higher selling prices for its primary products.

In the first-quarter 2018 earnings conference call management boosted its full-year 2018 adjusted EBITDA guidance to a range of $3.5 billion to $3.7 billion, up from a previous range of $2.6 billion to $2.8 billion.

Also, Alcoa expects a global market deficit in both alumina (the raw material that makes aluminium) and aluminium. The aluminum deficit could reach as much as 1 million metric tons, well ahead of the previously forecasted deficit of 700,000 metric tons. The alumina market deficit could reach 1.1 million metric tons, up from previous expectations for a balanced market.

Influencing Factors

Alcoa shares rallied to a record high of $62.33 in mid-April following a meet-up with the 200-day moving average; thanks to news the U.S. was placing sanctions on Russia's Rusal. However, the stock subsequently pulled back on headlines that those sanctions could be eased. Now, AA is hovering near where it was trading before the Rusal news initially hit; putting it again right near its 200-day moving average.

You can see on the chart below how strong the support was from this trendline back in March and April, and the 200-day could again be poised to mark a good entry point. Not to mention, previous support near $45 sits below, and the 14-day Relative Strength Index (RSI) for Alcoa is just above oversold territory at 33.44.

Thanks to improved aluminum market fundamentals, Alcoa’s cash flow generation capacity has improved. The company generated free cash flow of $819 million last year. Alcoa could use its free cash flow toward further deleveraging. A dividend restart is also in the cards.

Alcoa is among the few pure-play integrated aluminum producers with strong first-quartile cost positions in bauxite and alumina (RIO). Notably, alumina prices recently touched an all-time high, negatively impacting the earnings of companies that don’t have upstream operations, such as Century Aluminum (CENX).

Alcoa’s valuation is currently the cheapest since its listing as a separate company in 2016. The stock is valued at an enterprise value of 3.7x its 2018 consensus EBITDA and 4.1x its 2019 expected EBITDA.

Also, Alcoa has seen solid earnings estimate revision activity over the past month, suggesting analysts are becoming a bit more bullish on the firm’s prospects in both the short and long term.

In fact, over the past month, current quarter estimates have risen from 90 cents per share to $1.22 per share, while current year estimates have risen from $3.19 per share to $4.35 per share.

Analysts and Hedge Funds Opinions

Credit Suisse analyst Curt Woodworth maintained a Buy rating on Alcoa Inc  last Friday and set a price target of $71.

Several equities analysts have recently commented on the company…..

  • 5/2/2018 – Alcoa is now covered by analysts at Jefferies Group LLC. They set a “buy” rating and a $65.00 price target on the stock.
  • 4/24/2018 – Alcoa was downgraded by analysts at Citigroup from a “buy” rating to a “neutral” rating. They now have a $57.00 price target on the stock, down previously from $67.25.
  • 4/24/2018 – Alcoa had its price target raised by analysts at Morgan Stanley from $55.00 to $60.00. They now have a “buy” rating on the stock.
  • 4/23/2018 – Alcoa was given a new $70.00 price target on by analysts at Deutsche Bank. They now have a “buy” rating on the stock.
  • 4/20/2018 – Alcoa had its price target raised by analysts at Argus from $59.00 to $69.00. They now have a “buy” rating on the stock.
  • 4/19/2018 – Alcoa had its price target raised by analysts at JPMorgan Chase. They now have an “overweight” rating on the stock.

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

  • BlackRock Inc. boosted its stake in shares of Alcoa by 7.0% during the 4th quarter. BlackRock Inc. now owns 8,761,507 shares of the industrial products company’s stock worth $471,984,000 after acquiring an additional 570,178 shares during the period.
  • Alliancebernstein L.P. boosted its stake in shares of Alcoa by 207.1% during the 4th quarter. Alliancebernstein L.P. now owns 5,279,091 shares of the industrial products company’s stock worth $284,385,000 after acquiring an additional 3,559,958 shares during the period.
  • BT Investment Management Ltd boosted its stake in shares of Alcoa by 2.5% during the 4th quarter. BT Investment Management Ltd now owns 2,592,629 shares of the industrial products company’s stock worth $139,665,000 after acquiring an additional 64,148 shares during the period.

Harvey’s Options Volatility Indicator

Summary

Alcoa has worked diligently in recent years to manage risks facing the business and improve the efficiency of operations. Those efforts have been the primary driver of the business' success in the last year or two, allowing it to take full advantage of imbalances in the global markets for alumina and aluminum. Considering those shortages are likely to remain for at least the next year, and that the balance sheet is more resilient for when the next industry downcycle arrives, this options trade seems quite solid.

AA has a quick ratio of 0.86, a current ratio of 1.30 and a debt-to-equity ratio of 0.20. The company has a market cap of $10,126.09, a price-to-earnings ratio of 18.36, a P/E/G ratio of 1.20 and a beta of 0.15. Alcoa Corp has a 52 week low of $29.55 and a 52 week high of $62.35.


Option Trade – Dicks Sporting Goods Inc (NYSE:DKS) Puts

Tuesday, May 29, 2018

** OPTION TRADE: Buy the DKS JUNE 15 2018 30.000 PUT at approximately $1.60 to $1.70. Place a pre-determined sell at $3.20.

Also include a protective stop loss of $0.65.

Dicks Sporting Goods Inc. (NYSE:DKS), an omni-channel sporting goods retailer offering an assortment of sports equipment, apparel, footwear and accessories in its specialty retail stores in the eastern United States, is confirmed to report earnings tomorrow, Wednesday, May 30, 2018, before the market opens. The consensus earnings estimate is $0.42 per share; however, the Whisper number is for $0.46 per share.

Consensus estimates are for earnings to decline year-over-year by 22.22% with revenue decreasing by 45.27%.

Short interest has increased by 5.4% since the company's last earnings release.

Dick’s has been rather lackluster so far in 2018. Last quarter the company was able to top estimates on the bottom line, but sales were weaker than expected, and the stock has trended lower since that report.

Influencing Factors

DICK'S Sporting has underperformed the industry in the past month, reflecting a negative sentiment ahead of earnings. The company's shares have declined 8.1% against the industry's increase of 6.3%.

The stock is troubled by the soft top-line performance in the last-reported quarter, due to softness in hunting and electronic categories.

Additionally, the company's margins continue to be strained for the past few quarters.

As well, the company expects the hunting and firearm, as well as electronics businesses, to experience headwinds throughout fiscal 2018, which will hurt the top line. The hunting and firearm business will continue to be impacted by the recent changes to the company's firearm policies, while the electronics business will be hurt by reduced exposure to this business.

While innovations and growth of private brands are likely to ease margin pressures in fiscal 2018, the company still anticipates margins to be negative. Consolidated operating margins are expected to decrease year over year in fiscal 2018, due to SG&A deleverage, relating to increased investments in business and restoration of incentive compensation to historic levels.

Analysts and Hedge Funds Opinions

Dick’s Sporting Goods has received an average recommendation of “Hold” from the thirty-three brokerages that are presently covering the stock. Three investment analysts have rated the stock with a sell recommendation, seventeen have assigned a hold recommendation and thirteen have assigned a buy recommendation to the company. The average 12 month price objective among brokers that have updated their coverage on the stock in the last year is $34.77.

Several equities analysts have recently commented on the company…..

  • Barclays downgraded shares of Dick’s Sporting Goods from an “equal weight” rating to an “underweight” rating and cut their target price for the company from $33.00 to $25.00 in a research note on Monday, February 5th.
  • ValuEngine lowered shares of Dick’s Sporting Goods from a “buy” rating to a “hold” rating in a report on Friday, February 2nd.
  • Wedbush reiterated a “neutral” rating and issued a $32.00 price objective (up from $28.00) on shares of Dick’s Sporting Goods in a report on Wednesday, March 7th.

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

Manning & Napier Group LLC lowered its stake in shares of Dick’s Sporting Goods by 14.2% during the first quarter. The firm owned 1,136,835 shares of the sporting goods retailer’s stock after selling 188,290 shares during the period. Manning & Napier Group LLC owned approximately 1.06% of Dick’s Sporting Goods worth $39,845,000 at the end of the most recent reporting period.

  Harvey’s Options Volatility Indicator

Summary

Dick’s Sporting Goods has a market cap of $3,680.70, a PE ratio of 11.62, a price-to-earnings-growth ratio of 1.20 and a beta of 0.50. Dick’s Sporting Goods has a 1-year low of $23.88 and a 1-year high of $52.13. The company has a debt-to-equity ratio of 0.03, a quick ratio of 0.21 and a current ratio of 1.41.





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