“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, June 15, 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 – Dollar General Corp. (NYSE:DG) Calls

Wednesday, June 17, 2020

** OPTION TRADE: Buy DG AUG 21 2020 195.000 CALLS at approximately $6.40 (Up to $6.80).

Place a pre-determined sell at $12.80.

Also include a protective stop loss of $2.55.

Preamble.....

Tennessee-based discount retailer Dollar General Corp. (NYSE:DG), has been a standout performer during the pandemic and will likely continue to be one after the crisis passes.

Dollar general looks quite resilient owing to its business model and products it offers, which have been in demand amid the pandemic.

The deep discounter's core customer tends to be very price sensitive, which bodes well for the retailer in good times, but more so during periods of uncertainty or even recession. Despite the calamity that was going on all around us, Dollar General still opened 250 new stores, enabling the value and convenience it delivers to reach even more consumers.

Consumer sentiment grew visibly bullish in early June, aided by reopening of businesses and renewed hiring spree. The consumer confidence index increased to a reading of 78.9 earlier this month from 72.3 in May, marking the second straight gain after a record plunge in April.

The uptick in consumer confidence follows the Labour Department report, which states that the US economy unexpectedly regained 2.5 million nonfarm payroll employments in the month of May, lowering the unemployment rate by 1.4 percentage points to 13.3%.

The turnaround is largely due to renewed gains in employment, with more consumers expecting declines in the jobless rate.

This is also in line with the analysts’ expectations, as improved jobs outlook lifted consumers’ spirits.

Earnings…..

The stock also got a boost following the company’s better-than-expected first-quarter fiscal 2020 results, wherein both the top and the bottom line improved year over year. Further, the company witnessed robust same-store sales performance. This was the fifth straight quarter of positive earnings and sales surprises. Management stated that change in consumer behavior due to the coronavirus pandemic had a favorable impact on the performance.

Although management withdrew fiscal 2020 guidance issued on Mar 12, it still expects the company to surpass the same. The company had earlier projected an increase of 10% in earnings per share on a year-over-year basis. It had guided net sales growth of 7.5-8% and same-store sales increase of 2.5-3% for the fiscal year.

Influencing Factors.....

Better pricing, private label offerings, effective inventory management, and merchandise initiatives have aided Dollar General in carving out a niche in the retail space. It remains committed toward ramping up investments in the wake of rising competition.

The company’s everyday low-price model is anticipated to drive traffic persistently. With the store expansion initiatives, continued restructuring and the improvement of distribution centers should keep driving revenues higher.

Same-store sales increased 21.7% year over year owing to rise in average transaction amount and customer traffic during the first quarter. Consumables, Seasonal, Apparel and Home categories favorably impacted the metric. The metric improved 5.5%, 34.5% and 21.5% in the months of February, March and April, respectively.

Dollar General, since the end of the first quarter, has continued to witness “elevated demand” across its stores. Since the end of first quarter and through May 26, same-store sales have risen roughly 22% compared with prior-year period.

In order to increase traffic, Dollar General has been focusing on both consumables and non-consumables categories. The company has been also offering better-for-you products at affordable prices. Also, the company has been expanding cooler facilities to enhance the sale of perishable items and rolling out DG digital coupon program and DG Go app.

Management introduced two transformational strategic initiatives — DG Fresh, designed to enable self-distribution of fresh and frozen products, and Fast Track, an in-store labor productivity and customer convenience initiative.

By the end of fiscal 2020, the company plans to operate up to ten DG Fresh distribution facilities, which will serve roughly 12,000 stores.

Analysts Outlook…..

Dollar General shares have jumped this year, as the discounter’s essential status and focus on value have made it a winner in the retail landscape. Expect that trend to continue, says Guggenheim.

Analyst John Heinbockel reiterated a Buy rating on Dollar General stock (ticker: DG) Monday while raising his price target to $210 from $170. He acknowledges that the shares, which are bumping up against fresh highs, have gotten a temporary boost from the coronavirus pandemic. Yet he argues that “much remains to like about the story, especially if a risk-off climate returns.”

The picture certainly looks bright near-term, he argues, as the company will likely be able to maintain above-average operating momentum vis-à-vis retail peers, and its sales and profits—estimated to jump 17% and 26% in the second quarter—are easily the strongest in the group, and might be too conservative still. He believes the company is seeing a boost not only from consumers stocking up on basics, but also trading down to cheaper discretionary items, spending government stimulus, and strong company execution.

Yet there’s reason to be optimistic going forward as well. The company’s strong balance sheet means that it can return nearly $3.5 billion to shareholders in the next year and a half, while he expects that Dollar General’s momentum will carry into 2021—even against difficult year-over-year comparisons—helped by prosperous new locations, and its larger discretionary business. He’s also upbeat about company-specific initiatives, especially its push into grocery, which could give margins a meaningful boost next year.

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

  • Morgan Stanley upped their price objective on shares of Dollar General from $218.00 to $222.00 and gave the stock an overweight rating in a report on Thursday, June 4th.
  • JPMorgan Chase & Co. upped their price objective on shares of Dollar General from $202.00 to $218.00 and gave the stock an overweight rating in a report on Friday, May 29th.
  • Finally, Bank of America upped their price objective on shares of Dollar General from $200.00 to $220.00 and gave the stock a buy rating in a report on Wednesday, May 13th.

Five research analysts have rated the stock with a hold rating, twenty have issued a buy rating and two have assigned a strong buy rating to the company’s stock. Dollar General has a consensus rating of Buy and an average price target of $194.96.

So…..

Despite its stock rising nearly 50% from its March low, Dollar General still trades at a very reasonable 21 times estimates. It is the dollar store leader and still represents a good investment opportunity.

Dollar General has a 12-month low of $125.00 and a 12-month high of $194.84. The company has a debt-to-equity ratio of 1.65, a quick ratio of 0.60 and a current ratio of 1.44. The stock has a 50-day moving average price of $181.72 and a 200 day moving average price of $163.53. The firm has a market cap of $47.29 billion, a P/E ratio of 24.30, a P/E/G ratio of 1.82 and a beta of 0.52.


Option Trade – Draftkings Inc (NASDAQ: DKNG) Calls

Tuesday, June 16, 2020

** OPTION TRADE: Buy DKNG AUG 21 2020 45.000 CALLS at approximately $5.50 (Up to $6.00).

Place a pre-determined sell at $11.00.

Also include a protective stop loss of $2.20.

Preamble.....

Online sports and gaming name DraftKings (NASDAQ:DKNG) is heading up the charts. As U.S. states continue to legalize sports betting, the sportsbook giant has a massive growth runway.

The novel coronavirus may have put sports on hiatus. But with the NFL planning to hold games as scheduled this fall and the NBA starting back up as well, professional sports is coming back in a big way.

With more Americans now able to legally bet on the games, the company could see strong numbers during what’s typically the sport betting industry’s “busy season” (September through March).

This is one of the few pure-play sports betting stocks available. Most other rivals largely trade on the over-the-counter markets, limiting their appeal to institutional and retail investors.

In short, buying DraftKings stock is the only way for most investors to bet on this trend. This means shares could continue to rise way beyond a reasonable valuation.

DraftKings' revenue has held up well during the COVID-19 crisis. Its revenue climbed 30% in the first quarter, despite the pandemic's negative impact on live sports events. DraftKings has provided bettors with the chance to place wagers on other events such as esports, which has helped to keep customers engaged with its platform.

Moreover, DraftKings' growth may be about to accelerate. Recent mixed martial arts contest UFC 249 was "officially the most-bet MMA event in DraftKings Sportsbook history," according to DraftKings communication director Stephen Miraglia. With the NFL, NBA, and NHL gearing up to restart in the weeks and months to come and Major League Baseball potentially resuming in the summer, sports bettors could soon have a lot more games to bet on.

DraftKings Beginning.....

During 2019 DraftKings, which started life offering fantasy games to avoid being accused of being a bookie joint, had revenue of $323 million. Its market cap on May 13 was over $8.2 billion.

But today’s DraftKings isn’t that DraftKings. In December, before coming public, DraftKings merged with SBTech, a Europe-based provider of online gaming technology. This means it can offer both sports bets and casino games, once that’s legal. In a presentation upon the merger, DraftKings estimated the ultimate size of the U.S. sports betting market at $14-$23 billion.

 Influencing Factors.....

The U.S. sports betting market is just getting warmed up since the 2018 Supreme Court decision gave all 50 states the option to legalize sports gambling.

With professional football and basketball slated to start later this year, it looks likely DraftKings can live up to the hype.

Specifically, major league baseball looks poised to launch a shortened season in July, while the NBA is likely to resume its season soon and the NFL will probably start its season on time at the beginning of September.

On Friday, New Jersey's Division of Gaming Enforcement said the state's internet gaming revenue in May surged 124% year over year to $85.9 million. 

This bodes well for DraftKings. The digital sports entertainment company has an online gaming presence in New Jersey and several other states.

After fantasy sports fanatics will have spent several months without any teams to manage, many of them will run to join three or four leagues at once in the third quarter.

As a result, in October DraftKings should report blowout Q3 results that will likely propel DraftKings stock much higher. The trend should continue in Q4, when the NFL’s playoffs occur and the NBA’s season resumes.

With DraftKings aggressively building up market share in these states, the company has a clear first-mover advantage, as more states legalize sports betting.

The company’s past life as a fantasy sports operator provides an existing customer base to market its budding sportsbook operations.

Earnings Outlook…..

DraftKings stock has high levels of projected growth. Analyst consensus estimates revenue to climb from around $457 million in 2020, to about $718 million in 2021. In other words, around 57% annual projected sales growth.

In Q1, iGaming delivered “strong results,” DraftKings reported. Further, after professional sports shut down in the U.S., the company’s iGaming offerings became more popular as sports betting fans increasingly turned to online casino games, DraftKings CFO Jason Park reported.

That trend likely continued during Q2, since all major sports leagues have remained closed this quarter. Additionally, DraftKings’ iGaming business was likely boosted in Q2 by the fact that brick-and-mortar casinos in the U.S. were forced to shut their doors during the quarter.

And even though brick-and-mortar casinos are starting to reopen now, many Americans will likely prefer to gamble online due to their fears of the coronavirus. Finally, as with sports betting, many states are likely to legalize iGaming in order to raise revenue. And once again, DraftKings should benefit from its status as a first-mover in the space.

DraftKings can eventually bring both sports betting and iGaming to other countries. Such an expansion should greatly boost DraftKing’s results and its stock.

So…..

Given DraftKings’ strong first-mover advantage in online sports betting and its high name recognition among avid sports fans, DraftKings stock should benefit tremendously from this trend.

Meanwhile, in both the short-term and the longer term, DraftKings should be lifted by the growth of online betting on traditional casino games. DraftKings refers to such betting as “iGaming.”

The return of professional sports and the strong popularity of iGaming will boost the shares further in the shorter term.