“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, July 23, 2018

by Ian Harvey

IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO "Trading Capital Management"

Options Trade - - AbbVie Inc (NYSE:ABBV) Puts

Thursday, July 26, 2018

** OPTION TRADE: Buy ABBV Sept 21 2018 85.000 PUT at approximately $1.20. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $2.40.

Also include a protective stop loss of $0.50.)

The North Chicago, IL-based company AbbVie Inc (NYSE:ABBV), a research-based biopharmaceutical company, reports second-quarter 2018 results tomorrow, July 27, before the market opens. In the last reported quarter, the company delivered a positive earnings surprise of 3.89%.

Even though AbbVie's earnings history is quite impressive with the pharmaceuticals company outpacing estimates in all the last four quarters with an average beat of 2.39%, this upcoming report may be affected by several factors.

In April we recommended a Call Option on AbbVie and had a potential return of 209%.

But times change and I must agree with short-seller Andrew Left's Citron Research prediction that the  U.S. drugmaker AbbVie Inc's stock could fall to $60 a share (maybe not this low however), arguing that new regulations to speed biosimilar drugs to the market and reform rebates will hurt revenue from the company's top-selling drug, Humira.

This is despite several other analysts stating that deals AbbVie has signed with rivals such as Amgen Inc, Biogen Inc and Mylan NV to prevent them from launching biosimilar competitors to Humira until 2023 will likely protect the company from any of the moves regulators make in the near-term.

Left initially tweeted the $60-a-share call last Thursday. The shares fell as much as 7 percent that day before closing 4.7 percent lower. AbbVie shares closed up 2.4 percent at $91.54 on Tuesday.

In a research note published on Tuesday afternoon, Left detailed his skepticism about AbbVie's prospects. "There finally seems to be changes coming to the system," he wrote.

Last week, U.S. Food and Drug Administration Commissioner Scott Gottlieb laid out a plan to increase biosimilar competition for biologic drugs. The Trump administration has proposed a rule that would scale back protections currently in place that allow rebates between drug manufacturers and insurers and pharmacy benefits managers.

Assuming the government acts, Citron says, AbbVie -- "one of the worst abusers" of the system with "egregious pricing practices" -- will head much lower.

Humira, for rheumatoid arthritis and other autoimmune diseases, is the world's top selling prescription medicine with sales expected to exceed $20 billion this year, according to Thomson Reuters data.

However, international sales growth for Humira is likely to drop in Q2. The primary reason for this is that AbbVie benefited from the timing of shipments in the first quarter that won't be a factor this time around. As a result, Humira sales are likely to slip quarter over quarter.

And in the U.S., where AbbVie makes close to 64% of its total revenue for Humira? In Q1, Humira's sales were dented a bit by inventory destocking at a major specialty pharmacy. The company thinks there will be some continued destocking in Q2, which could dampen sales for Humira a little.

Status At The Moment….

ABBV stock gapped lower last Thursday after the aforementioned Citron tweet, hitting a year-to-date low of $86.76 in the following session. However, the shares seem to have found support from a familiar ally in the round-number $90 region. This level contained ABBV's pullback earlier this year, and represents a 50% Fibonacci retracement of the stock's rally from its October 2016 closing low of $55.78 to its January 2018 closing high of $123.21. It's also home to ABBV's ascending 320-day moving average.

However, it seems recent options buyers are expecting AbbVie stock to retreat in the short term, with put buying ramping up ahead of the company's earnings release. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day put/call volume ratio of 1.01 -- in the 96th percentile of its annual range. This indicates that options buyers have picked up ABBV puts over calls at a near annual-high clip in the past two weeks.

AbbVie faces a strong competitor in Gilead Sciences. The big biotech has been predicting that its HCV market share will stabilize in mid-2018. I expect that Gilead is right, which means that Mavyret's sales will likely stabilize, too.

Analysts and Hedge Funds Opinions

Several analysts have recently commented on the company and have all had negative reviews…..

  • Barclays reduced their target price on shares of AbbVie from $120.00 to $102.00 and set an “equal weight” rating on the stock in a research report on Thursday, April 5th.
  • Morgan Stanley reduced their target price on shares of AbbVie from $131.00 to $110.00 and set an “equal weight” rating on the stock in a research report on Monday, April 30th.
  • Zacks Investment Research lowered shares of AbbVie from a “buy” rating to a “hold” rating in a research report on Saturday, July 14th.
  • Credit Suisse Group upgraded shares of AbbVie to a “hold” rating and set a $89.00 target price on the stock in a research report on Friday, July 13th.
  • Finally, BMO Capital Markets reiterated a “sell” rating and set a $81.00 target price on shares of AbbVie in a research report on Tuesday, May 1st.

Long-term, I think that the outlook for the company continues to look good. However, concentration for the short-term with this put option, if all proceeds accordingly, then a winner is likely to develop!

Options Trade - - Papa John's Int'l, Inc. (NASDAQ: PZZA) Puts

Wednesday, July 25, 2018

** OPTION TRADE: Buy PZZA AUG 17 2018 45.000 PUT at approximately $2.00. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.)

Papa John's Int'l, Inc. (NASDAQ: PZZA) is in disarray right now. Founder and former CEO John Schnatter has created a whirlwind of bad publicity for the company, ranging from Schnatter making controversial comments regarding NFL anthem protests, to him using a racial slur on conference calls to Forbes blowing the lid open on what they call a "toxic culture" fostered by Schnatter.

The ongoing battle between Papa John's and its founder is putting the company in a precarious position, threatening not just future sales, but employee and franchisee commitment to the brand, an analyst said, as he downgraded the stock to sell from hold.

Shares of Papa John's fell nearly 10 percent in afternoon trading Monday to a 52-week low, on pace for its worst day since November 2015 when the stock plummeted on a weak earnings report. The stock is down more than 30 percent over the last year.

"The outlook for Papa John's is growing dimmer with recent media reports citing a fraternal corporate culture that is reinforcing consumer perception that Papa John's is not a trusted brand," Chris O'Cull, a Stifel analyst, wrote in a research note Sunday.

Papa John's is attempting to distance itself from its disgraced founder John Schnatter, who used racist language during a media training call with its marketing agency. Although Schnatter resigned from his position as chairman, the board took an additional step of enacting a shareholder rights plan, or a "poison pill," to prevent Schnatter from acquiring a controlling stake in the company.

Schnatter owns nearly 30 percent of the company's shares, but some have called for him to step down from the board.

O'Cull foresees irreparable damage to Papa John's same-store sales, a key metric for restaurant companies, especially as employee morale shrinks and customers view the brand in a negative light.

In addition to Schnatter's comments on the call, for which he has apologized, there was another report that painted a picture of a very toxic culture at the company. A special committee of Papa John's board has hired an outside firm to audit and investigate the company's culture and implement any needed changes.

The reports of declining sales show store owners are bearing the brunt of the fallout after the news exploded that Schnatter, who until recently was the company’s chairman, used a racial slur on a call with a media agency. Papa John’s is about 79 percent franchised domestically, meaning independent owners operate the restaurants.

“Given the franchisor’s actions have put the franchisees in this unhealthy financial condition, we expect the company may need to provide some royalty relief or other financial assistance to keep franchisees from closing restaurants,” O’Cull said in a note to clients.

The bad publicity comes as Papa John’s was already struggling to compete with a resurgent Domino’s Pizza Inc., which has seen sales jump as its low prices and mobile-ordering options resonate with diners. Yum! Brands Inc., meanwhile, is renewing efforts to improve sales at its Pizza Hut unit and has replaced Papa John’s as the NFL’s sponsor for the 2018 season.

Papa John’s, whose U.S. restaurant count shrank by 17 last year, has tried to improve its value image and tout its cleaned-up ingredients. Same-store sales growth for domestic franchise locations started slowing steadily in 2016 and has turned negative for two straight quarters.

Influencing Factors

Management isn't focused on growth. Perhaps most importantly, these issues create what amounts to a massive distraction for Papa John's management and board. Effort and resources are being allocated to fixing Papa John's culture and restoring public faith in the brand, all while preventing a hostile takeover from Schnatter, who isn't going quietly. Thus, there isn't much time, effort, or resources left to allocate towards growth strategy, and that is why Domino's has been dominating the pizza space recently.

The consumer fall-out from Papa John's as a result of negative publicity likely won't be large, but it will affect near-term traffic trends and financials. That means that any operational turnaround in this brand is likely at least one to two quarters out, once negative headlines have moved into the rear-view mirror.

Potential buyers are discouraged. Before Schnatter stepped down as Chairman, he had held potential merger talks with Wendy's (WEN). But, such talks went cold once Schnatter stepped down. Now, Schnatter is trying to regain control and presumably resume these talks, but the board has adopted a poison pill strategy to avoid this from happening. Thus, a Wendy's buyout offer is unlikely at this point in time. Meanwhile, other buyers are likely discouraged by all this legal drama, and the likelihood of someone stepping forward and buying Papa John's here and now is small.

A Kentucky university is booting Papa John's pizza off of its campus after the chain's founder admitted making racist remarks.

Northern Kentucky University's new president, Ashish Vaidya, told the campus community on July 23 that it is asking its external food service provider, Chartwells, to remove the Papa John's pizza franchise from the Highland Heights campus.

"Recent remarks made by the founder of the pizza chain Papa John’s are offensive, hurtful and unacceptable and do not reflect the core values of NKU," Vaidya said in a letter to campus.

Moving Forward…..

"We believe the company is in a precarious position — needing a strategic savior but struggling to find one willing to underwrite a transaction given the brand damage," O'Cull wrote.

He said that recent checks made by Stifel indicated that same-store sales have declined in the mid-teens in the last several days. Because of this, O'Cull lowered his third- and fourth-quarter estimates for the company's domestic same-store sales. He expects same-store sales will fall 12 percent in the third quarter, and drop 10 percent in the fourth.

O'Cull also estimated that the average franchisee's annual store cash flow will fall to $60,000 in 2018 from $95,000 in 2016. He said that Papa John's may need to provide royalty relief or other financial assistance to keep franchisees from closing their locations.

"The implications of the current situation are far-reaching," O'Cull said. "For example, employee morale is likely extremely low at the corporate office and in the field following media reports about senior executive behavior and with the likelihood compensation and continue employment could be at risk from the declining sales."


Headwinds create a lot of noise in PZZA stock. Noise lends itself to uncertainty, and uncertainty usually accompanies sell-offs. That is why PZZA stock has been, still is, and will likely remain in sell-off mode until more clarity arises as to how the Schnatter situation plays out.

Options Trade - - Xilinx, Inc. (NASDAQ: XLNX) Calls

Tuesday, July 24, 2018

** OPTION TRADE: Buy XLNX AUG 17 2018 70.000 CALL at approximately $1.45. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $2.90.

Also include a protective stop loss of $0.60.)

Xilinx, Inc. (NASDAQ: XLNX), a designer and developer of programmable devices and associated technologies worldwide, had its start back in the 1980’s; by inventing a new class of programmable chipsets called FPGAs (field-programmable gate arrays), which could be reprogrammed after being shipped.

Today, Xilinx is the world's top maker of FPGAs, which are used across a wide range of industries. Its only meaningful competitor is Intel, which acquired Xilinx's top competitor Altera in 2015.

Xilinx generates its revenue from three core markets -- Communications and Data Center customers; Industrial, Aerospace and Defense customers; and Broadcast, Consumer and Automotive customers.

Xilinx is set to report fiscal first-quarter 2019 results tomorrow, July 25, after the market closes. Based on 9 analysts' forecasts, the consensus EPS forecast for the quarter is $0.73. The reported EPS for the same quarter last year was $0.63.

Wall Street expects Xilinx's revenue to rise 8% this year, and for its earnings -- which dipped on higher expenses last year -- to grow 38%.

For first-quarter fiscal 2019, Xilinx projects revenues in the range of $660-$690 million (mid-point $675 million). The mid-point of the company's guided range is currently higher than the Zacks Consensus Estimate of $672 million.

Xilinx's Communications and Data Center market was its weakest one last quarter, but that softness was offset by the double-digit sales growth from the other two segments. Many of its newer chips are used for AI and machine learning tasks.

Xilinx trades at 24x earnings and pays a forward dividend yield of 2.1%. Xilinx has often been cited as a takeover target following Intel's takeover of Altera.

Influencing Factors

Xilinx's ongoing transition from a field programmable gate arrays (FPGA) provider to an all-programmable devices producer has been helping the company gain market share and counter stiff competition from the likes of Intel INTC.

As well, increasing demand for the company's Ultrascale+ FPGAs from data-center operators for providing FPGA-as-a-Service looks promising, with the client base featuring prominent names like Amazon and Alibaba .

The company's 28-nanometer Zynq and 16-nanometer MPSoC product witnessed a new sales record, growing more than 60% year over year in the last reported quarter. Demand in all the company's end markets i.e. automotive, industrial, and aerospace and defense, communication and consumer has been a tailwind.

Xilinx has been stepping up its research and development (R&D) efforts over the past few years. It spent around a quarter of its revenue on R&D last year, up from 20% four years ago. In fact, the chipmaker's R&D expenses have been growing at a faster pace than its top line for three years now.

For the June quarter, Xilinx anticipates the Broadcast, Consumer & Automotive end markets to improve year over year. The rapid growth in advanced driver assist systems (ADAS) is a key driver of its automotive business.

Xilinx is also riding high on its Data Center business, which the company believes to be the fastest growing one. The company's focus on the business is further evidence from the newly formed Data Center and TME (Testing, Measurement, and Emulation) segment, its new business segment starting this quarter.

Moving Forward…..

Xilinx plans to increase its operating expenses nearly 10% in fiscal year 2019, which will be identical to its revenue growth. Quite clearly, Xilinx isn't focusing on boosting profitability right now; it's looking to accelerate its product roadmap to deliver more efficient chips.

The majority of the company's chips are currently based on the 28-nanometer (nm) and 20nm platforms, but it is planning to move to the more efficient 16nm and 7nm nodes. Chips manufactured using smaller nodes are more efficient because they can deliver more performance for each watt of power consumed. Additionally, they tend to have lower manufacturing costs, since the chipmaker can manufacture more integrated circuits from each wafer.

As such, Xilinx's manufacturing costs should come down once it starts mass production of such chips, leading to greater profitability. But this is just one side of the coin; making FPGAs using a more advanced manufacturing process should help Xilinx tap the lucrative AI market.

Analysts and Hedge Funds Opinions

Xilinx has been assigned a consensus rating of “Hold” from the twenty-four ratings firms that are currently covering the company. Three investment analysts have rated the stock with a sell recommendation, twelve have given a hold recommendation and nine have given a buy recommendation to the company. The average target price among brokers that have issued a report on the stock in the last year is $74.05.

Several analysts have recently commented on the company…..

  • Nomura raised shares of Xilinx from a “reduce” rating to a “neutral” rating and lifted their price target for the company from $60.00 to $70.00 in a research note on Wednesday, May 9th.
  • Macquarie decreased their price target on shares of Xilinx from $75.00 to $72.00 and set a “neutral” rating for the company in a research note on Thursday, April 26th.
  • BidaskClub raised Xilinx from a “sell” rating to a “hold” rating in a research report on Thursday, March 15th.
  •  JPMorgan Chase & Co. lowered Xilinx from a “neutral” rating to an “underweight” rating and set a $73.00 target price on the stock. in a research report on Friday, April 6th.
  • KeyCorp cut their target price on Xilinx from $87.00 to $80.00 and set an “overweight” rating on the stock in a research report on Thursday, April 26th.
  • Finally, Zacks Investment Research raised shares of Xilinx from a “hold” rating to a “buy” rating and set a $79.00 target price for the company in a research report on Saturday, April 7th.

Demand for artificial intelligence (AI) chips is going to go through the roof in the coming years. Allied Market Research estimates that AI chip demand could increase at almost 50% a year through the next five years, as this technology gains adoption across several verticals ranging from automotive to healthcare.

Xilinx is well aware of this massive opportunity, which is why AI-focused development was a common theme at its recent analyst day. The company has already taken its first steps in the AI space with the help of its field-programmable gate arrays (FPGAs), but it's now looking to raise its game by going all in on product development.

Xilinx has a market cap of $17.29 billion, a P/E ratio of 24.43, a price-to-earnings-growth ratio of 2.51 and a beta of 1.11. The company has a debt-to-equity ratio of 0.52, a quick ratio of 4.17 and a current ratio of 4.42. Xilinx, Inc. has a 52-week low of $60.12 and a 52-week high of $78.02.