“Cut-to-the-Chase” Recommendations
- Week Beginning 16th August, 2015 -
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. I would suggest a pre-determined sell price at 100% profit.
20th August, 2015
**OPTION TRADE: Buy the CHK Aug 2015 7.500 put (CHK150828P00007500) at approximately $0.45. Sell at 100% or use your own judgment.
Oil prices fell to six and half year lows yesterday, following a U.S. Energy Information Administration report, and Chesapeake Energy Corporation (NYSE: CHK), a natural gas and oil exploration and production company, was caught up in the rush with their shares falling 5.41% to $7.34 by the close of market.
WTI crude oil for September delivery was down 3.82% to $40.99 a barrel Wednesday afternoon, and Brent crude oil for October delivery was down 3.16% to $47.27 a barrel.
U.S. crude inventories grew by 2.6 million barrels in the week ending August 14, according to the EIA report. Analysts surveyed by Reuters expected inventories to fall by 777,000 barrels.
Chesapeake Energy is continuing to lose market share, with the natural gas player's stock losing over 60% of its value in 2015. The company's high leverage, coupled with weak natural gas pricing and consistent oversupply in the end market, has weighed heavily on its financial performance in the past year.
In fact, when Chesapeake reported its latest set of results in early August, its revenue was down 41% year-over-year, while earnings dropped to $0.11 per share from $0.36 per share in the prior-year period, triggered by a 59% drop in natural gas pricing. Other negative factors are:-
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry.
• Last month, Chesapeake suspended its dividends which it has been paying since 2002. By doing that, it became the first S&P-500 energy company to eliminate dividends due to the slump in oil prices.
• The company's long-term debt stands at $10.6 billion -- that's bigger than the total equity of $10.2 billion. In the previous quarter, Chesapeake generated operating cash flow of $606 million which wasn't enough to cover the capital expenditure of $957 million.
• Chesapeake hasn't generated positive free cash flows since 2008, and this trend is unlikely to change in the future, since it is not expecting a turnaround in the pricing environment any time soon.
• Moreover, Chesapeake will likely report another major deficit next year.
• Many analysts have taken a negative view as of-late with a hold, sell or lowered price target -- Jefferies Group, TheStreet, Howard Weil, Credit Suisse and Barclays reaffirmed their “sell” rating and lowered their price target from $7.00 to $5.00.
Natural gas pricing has remained under pressure so far this year, and the trend is anticipated to continue going forward. This is because after a period of decline earlier this year, natural gas production has shot up once again in the past few months, while consumption has dropped.
As a result of this increasing production and weak consumption, natural gas inventories have risen more than expected of late. Last Thursday, natural gas prices fell the most in six months as natural gas inventories increased by 65 Bcf in the week that ended on August 7. In comparison, analysts were looking for an increase of 55 Bcf.
This indicates that the natural gas market will continue remaining under pressure going forward as the oversupply is consistently increasing. Moreover, next year, the EIA is of the opinion that natural gas consumption in the power sector will decline by 3.4%, following an increase of 13.9% this year. Now, consumption by the power sector has been the key driver of natural gas demand this year, as the fuel has overtaken coal in electric utilities for power generation.
Looking ahead, the Chesapeake CEO doesn't see any recovery in natural gas prices, which is not surprising as the end-market's dynamics are not improving – and yesterday’s problems are here to stay for the meantime.
19th August, 2015
**OPTION TRADE: Buy the TWTR Aug 2015 28.000 put (TWTR150828P00028000) at approximately $0.60. Sell at 100% or use your own judgment.
Twitter's still struggling to acquire users. More than a billion people have tried the service and subsequently abandoned their accounts – with only 139 million users (44% of the total user base) among Twitter's 316 million total users logged in all quarter. Facebook Inc., to put this in perspective, logged in 100 million daily users over the same time frame.
For social media companies, engagement is critical. And those who actually stay on Twitter simply aren't engaging. The numbers are so bad, in fact, that Twitter stopped reporting the most critical metric - timeline views per user. That was a "feature" that was supposed to encourage engagement and have a meaningful impact on increasing the number of users.
Serious management problems -- the CEO's seat is vacant and the company is experiencing a brain drain as it loses talented programmers and corporate leaders to more sure-footed rivals like Google. Rishi Garg, Twitter's vice president of corporate development, is the latest big fish to leave last month, for example.
Finally, analysts are seeing “the forest beyond the trees”. Yesterday, Twitter price target was reduced to $31 from $39 at MKM Partners, which maintained its "neutral" rating. They lowered longer-term expectations for revenue, profits, and users. They said “user-experience improvements are yet to be seen”.
Separately, TheStreet Ratings team rates Twitter Inc as a Sell with a ratings score of D.
TWTR's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 35.36%.
And finally, Twitter's trading at a forward PE ratio of 45.25 times projected earnings as of Dec. 31, 2016, which makes it a very expensive stock.
18th August, 2015
**OPTION TRADE: Buy the TGT Aug 2015 82.000 call (TGT150821C00082000) at approximately $0.70. Sell at 100% or use your own judgment.
It is expected that Target will thrash analysts’ expectations for the fourth straight quarter. The company has topped the earnings estimates five times in the last eight quarterly results and beaten the revenue estimates six times over the same period.
Wall Street is expecting Target to report earnings per share (EPS) of $1.11 and revenue of $17.39 billion in 2QFY15. Analysts’ projections show that the company’s earnings will jump 42.31% year-on-year (YoY) and revenue will slide 0.11% YoY in the upcoming quarterly report.
After posting solid results in 1QFY15, the company revised up its 2QFY15 EPS guidance from $1.01 to a range of $1.04-1.14. The company also lifted its full-year EPS guidance from $4.45-4.65 to $4.5-4.65.
Target is continuously reorganizing its top executive teams to acquire top talent to head the retail chain. Yesterday, the company promoted its chief financial offer (CFO), John Mulligan, to a newly created position, chief operating officer (COO).
12 out of 30 analysts who cover target stock advocate it as a Buy; 16 of them suggest it as a Hold and only two recommend it as a Sell. The consensus price target on the stock is $84.10.
18th August, 2015
**OPTION TRADE: Buy the INTU Aug 2015 110.000 call (INTU150821C00110000) at approximately $0.75. Sell at 100% or use your own judgment.
Last quarter Intuit Inc. posted a surprise factor of 1.94% as the analysts’ predictions were $0.05 away from the actual reported number of $2.63. The standard deviation of the estimates right before the announcement was $0.12.
Earnings this time around are expected to beat expectations due to several factors:-
• Intuit is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat.
• Intuit's growing SMB exposure and believe that strategic acquisitions will continue to support the segment.
• The increased adoption of its cloud-based services and products is another positive factor.
• The company has also restructured its business to focus more on QuickBooks services. It expects to continue to invest in the QuickBooks portfolio. Thus, higher investments will impact the company's profitability in the near term.
Clearly, recent earnings estimate revisions suggest that good things are ahead for Intuit, and that a beat might be in the cards for the upcoming report.
18th August, 2015
**OPTION TRADE: Buy the LOW Aug 2015 70.000 put (LOW150821P00070000) at approximately $0.45. Sell at 100% or use your own judgment.
Analysts see several factors that will influence this Quarter’s results – they observe that traffic was softer-than-expected in the beginning of the quarter which was likely due to weather related disturbances, which along with forex headwinds might weigh upon Lowe's second quarter performance.
Even though Lowe’s has moved higher as of late, there could definitely be trouble on the horizon for this company. That is because LOW is now in overbought territory with an RSI value of 70.17. (readings above 70 suggest an asset is overbought)
Yet LOW's high RSI value isn't the only reason for investors to be concerned, as there has been some decidedly negative earnings estimate revisions in Lowe's' stock as of late. Over the past two months there has been 4 earnings estimate revisions lower compared to none higher for the current year. The consensus estimate for LOW has also been on a downward trend over the same time period too, as the estimate has fallen from $3.30/share two months ago to just $3.29/share today.
17th August, 2015
**OPTION TRADE: Buy the TJX Aug 2015 70.000 put (TJX150821P00070000) at approximately $0.95. Sell at 100% or use your own judgment.
TJX Companies Inc (NYSE: TJX), a discount retailer, will announce its second-quarter results before the market opens on August 18. Analysts forecast earnings of $0.76 per share, up a penny from the same period last year. The stock is up a modest 2.5% on the year.
However, higher wages paid to laborers, as announced during the last conference call, are likely to hurt margins, in the second quarter. Moreover, foreign exchange headwind due to weakening of many foreign currencies against a strengthening dollar is expected to affect the top line negatively in the to-be-reported quarter.
The company’s subdued expectations for its gross margins in 2Q16 will also be affected by the increased supply chain costs.
Also, TJX Companies’ operating margin in 2Q16 might be affected by a rise in selling, general, and administrative costs (or SG&A) as a percentage of sales. The company expects SG&A as a percentage of sales in the 17.1%-to-17.2% range, compared to 16.2% in the comparable cost of the previous year.
Cantor Fitzgerald recently initiated coverage on TJX with a Hold rating on the shares. The Analysts at the ratings agency announces the price target to $66 per share.
And research firm Zacks has rated TJX with a rank of 3, indicating that for the short term the shares are a hold.
Herrman Ernie, officer (President) of TJX Companies had also unloaded 23,770 shares at an average price of $65.5 in a transaction dated on June 16, 2015. The total value of the transaction was worth $1,556,935.
As well, today is seeing a large outflow of money from TJX shares.
17th August, 2015
**OPTION TRADE: Buy the EL Aug 2015 85.000 put (EL150821P00085000) at approximately $0.65. Sell at 100% or use your own judgment.
The New York-based company reported quarterly net earnings of $153.0 million, or $0.40 per share, compared to $257.7 million, or $0.66 per share, in the year-ago period.
Its net sales slipped to $2.52 billion from $2.73 billion. However, analysts were expecting earnings of $0.34 per share on revenue of $2.57 billion.
The company's sales in skin care business dropped 16 percent to $1.01 billion, while sales in makeup business declined 4 percent to $1.02 billion. Fragrance business sales climbed 9 percent to $336.1 million in the quarter, while sales in hair care business rose 4 percent to $139.8 million.
For the first quarter, Estee Lauder expects net earnings, including the negative impact of foreign currency translation and acquisitions, of $0.66 to $0.69 per share. The company expects Q1 constant currency earnings of $0.75 to $0.78 per share, and net sales growth of 13 percent to 14 percent in constant currency. Analysts projected earnings of $0.81 per share.
Estee Lauder shares fell 2.03 percent to $87.02 in pre-market trading.
16th August, 2015
**OPTION TRADE: Buy the URBN Aug 2015 30.000 put (URBN150821P00030000) at approximately $0.50. Sell at 100% or use your own judgment.
These earnings are projected to be flat at 49 cents a share, while revenue of $882 million calls for a 9% year-over-year climb. So revenue is climbing at a decent rate, while earnings aren't expected to grow. In other words, despite the value implied in the discounted forward P/E of 14, against a P/E of 17 for the S&P 500 index, results could be very mixed.
Shares of Urban Outfitters are down more than 7% on the year and 14% in six months, and they are still under pressure, ever since the Philadelphia-based company angered investors with first-quarter earnings results which were extremely bad – and now three months later, URBN stock has lost an additional 5%.
Due to weak consumer spending, retailers - on average - are seeing less traffic and tepid same-store sales growth, but in the case of Urban Outfitters weak fundamentals are also a major concern.
Urban Outfitters is seemingly ceding pricing power to competitors like Forever 21 and H&M - two chains that have quickly grown in popularity among millennials.
Despite its growing revenue, the company underperformed as compared with the industry average of 8.6% -- since the same quarter one year prior, revenues slightly increased by 7.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
Regardless of URBN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.43% trails the industry average.
The likelihood of URBN stock reaching a new 52-week low to around $28 in the next few days after Monday's results is a big probability.
16th August, 2015
**OPTION TRADE: Buy the GPRO Aug 2015 62.000 call (GPRO150821C00062000) at approximately $0.50. Sell at 100% or use your own judgment.
GoPro Inc (NASDAQ: GPRO), a producer of mountable and wearable cameras and accessories, has just provided us with another great opportunity to profit from this option trades, as it is now selling for less than its price before its most recent blowout earnings report.
The catalyst for this sell-off, along with the broader market, came by the way of the Chinese surprise currency devaluation last week, causing GoPro to tumble 12% in just two days before recovering somewhat on Thursday, due to Cowen & Co initiating coverage on the stock with an Outperform rating and $76 price target.
For reference in regard to our last great opportunity associated with GoPro which occurred on the 15th July ….Read This .
However, China is not really a problem!! Even though China is starting to become an important market for GoPro, it is only 1 of the top 10 markets for GoPro, which means there are plenty of markets ahead of China in terms of sales. The whole APAC region -- which includes a lot of countries beyond China -- accounted for just 17% of GoPro's revenue last quarter.
Also, remember that China’s problems have been longer term and didn’t just start last week!
Therfore, it was not too surprising that GoPro stock had risen as high as $65 in the weeks following the Q2 report. Yet thanks to the recent sell-off, the stock is now cheaper than it was before investors got this huge dose of good news.
With the stock now trading at last month's price, we have been handed another great opportunity to profit with this option trade.
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