“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, October 02, 2017

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.


Option Trade - Harley-Davidson Inc. (NYSE:HOG) Puts

Friday, October 06, 2017

** OPTION TRADE: Buy the HOG OCT 20 2017 45.000 PUT at approximately $0.90.

Sell price is left to your own judgment.

Harley-Davidson Inc. (NYSE:HOG), which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise and related services, will release earnings on October 17, before the markets open.

Harley is expected to announce poor numbers — as has been the case for the last three quarters — see our option trade for July 17 – so in turn this trade should be a winner.

Last week, which ended on September 29, 2017, Harley-Davidson stock traded on a mixed note and ended the week at $48.21 with a minor weekly loss of 0.10%. The stock has fallen ~10.8% quarter-to-date and has seen a value erosion of 17.4% so far in 2017. And yesterday saw HOG stock price drop another 3.96%.

In 2Q17, Harley’s adjusted earnings were at $1.48 per share. That was about 4.5% lower than its earnings in the same quarter of the previous year.

HOG’s profit margins haven’t seen any significant positive growth in the last few quarters due to an unfavorable product mix. For Harley, lightweight motorcycles tend to yield lower profit margins than heavyweight motorcycles.

HOG’s management doesn’t expect any improvement in its fiscal 2017 profit margins.

Influencing Factors

HOG has been facing several operational challenges in 2017, which has hurt the stock. As of September 25, 2017, Harley-Davidson stock has fallen 16.1% year-to-date. That performance was much worse than other auto industry (XLY) players such as Honda (HMC), General Motors (GM), and Ford (F).

In 2Q17, HOG reported global revenues of ~$1.8 billion, which reflected a YoY (year-over-year) fall of 5.2%. In the previous quarter, its revenues fell 14.2% YoY. Its second-quarter gross margins were also flat at 36.5% compared to 36.4% the previous year.

In its 2Q17 earnings release, HOG’s management revised the company’s shipment guidance downward. Now management expects HOG’s 2017 global shipments to be 6.0%–8.0% lower than its 2016 shipments. Management also expects a 1.0% fall in its 2017 operating margin compared to the previous year. The dismal 2017 outlook could be the primary reason analysts are maintaining a cautious view on HOG stock at the end of 3Q17.

Harley-Davidson, Inc. HOG is expected to experience a period of continued weak sales, driven by low demand of new Harley motorcycles.

Recent researches show that millennials prefer buying less-expensive, used Harley-Davidson models or cheaper versions of other brands rather than going for new Harley-Davidson motorcycles. Also, the company's ageing core customer group and low prices of Harley-Davidson's used-motorcycles are other concerns it currently faces in the United States.

Owning a well-known brand at a low-cost budget encourage young Americans to buy used-motorcycles of the brand, Harley-Davidson, while paying their home and student loans. Per analysis, people are still interested in the brand, as they buy used-motorcycles, which definitely do not benefit the company or its shareholders.

These problems have led to its U.S. sales decline, contributing almost 60% of Harley-Davidson's total sales. Last fiscal year, the U.S. sales hit a five-year decrease. Plus, last quarter, the same segment sales fell 9.3% to 49,668 motorcycles.

Analysts and Hedge Funds Opinions

According to data compiled by Reuters, 77.0% of analysts covering Harley-Davidson stock have given it a “hold” recommendation. Only 18.0% have recommended a “buy,” and the remaining 5.0% have maintained a bearish view, giving it a “sell” rating.

As of September 25, 2017, Harley-Davidson’s consensus 12-month target price is $51. That suggests an upside potential of 4.2% from its market price of $48.95.

Analysts’ consensus target level for Harley-Davidson stock has fallen sharply in the last couple of months from $58.04 to $51.

Wedbush reiterated their neutral rating on shares of Harley-Davidson, Inc. in a research report released on Monday. Wedbush currently has a $45.00 price objective on the stock.

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

Jefferies Group LLC reissued a hold rating and issued a $49.00 price objective on shares of Harley-Davidson in a report on Tuesday, July 4th.

UBS AG reissued a neutral rating and issued a $57.00 price objective on shares of Harley-Davidson in a report on Monday, June 26th.

Finally, Aegis assumed coverage on shares of Harley-Davidson in a report on Monday, August 28th. They issued a hold rating and a $49.00 price objective for the company.

Institutional investors have recently made changes to their positions in the stock….

Public Sector Pension investment Board decreased its stake in Harley-Davidson, Inc. by 52.0% in the second quarter, according to the company in its most recent filing with the Securities & Exchange Commission. The institutional investor owned 19,294 shares of the company’s stock after selling 20,900 shares during the quarter. Public Sector Pension investment Board’s holdings in Harley-Davidson were worth $1,042,000 at the end of the most recent quarter.

Insider activity…..

Insider Lawrence G. Hund sold 15,013 shares of the firm’s stock in a transaction dated Wednesday, August 30th. The stock was sold at an average price of $47.18, for a total value of $708,313.34.

Summary

Harley-Davidson has a 52 week low of $45.53 and a 52 week high of $63.40. The firm has a market cap of $8.17 billion, a price-to-earnings ratio of 13.72 and a beta of 0.87. The firm has a 50 day moving average of $47.80 and a 200 day moving average of $52.66.


Option Trade - Fastenal Company (NASDAQ:FAST) Puts

Thursday, October 05, 2017

** OPTION TRADE: Buy the FAST OCT 20 2017 44.000 PUT at approximately $0.65.

Sell price is left to your own judgment.

Fastenal Company (NASDAQ:FAST), engaged in wholesale distribution of industrial and construction supplies, will report quarterly earnings on October, 11 before the market opens.

Wall Street analysts expect $0.50 earnings per share, up $0.06 or 13.64 % from last year’s $0.44 same quarter earnings. This translates into $144.03M profit for FAST giving the stock a 22.83 P/E. This is assuming the current $0.50 EPS is accurate.

Fastenal Company’s Wall Street analysts see -3.85 % negative EPS growth, taking into account the $0.52 EPS reported in the previous quarter. The stock decreased 0.33% or $0.15 during the last trading session, reaching $45.65.

Fastenal Company has declined 2.09% since October 5, 2016 and is down-trending. It has underperformed the S&P500 by 18.79%.

Influencing Factors

Unfortunately, there are a few speed bumps for Fastenal’s progress….

The first one is the consolidation of client businesses toward a smaller amount of distributors. Many clients concentrate their maintenance, repair, and operations with the same company. While FAST benefits from its wide network across the U.S., the current situation gives a lot more price negotiating power to clients. Therefore, expect FAST's revenue to grow, but margins will continue to slow down.

While it was once a growth vector, opening new stores isn’t part of the plan anymore. In fact, vending machines and onsite locations might not only hurt margins but also cannibalize a part of its sales.

As an industrial part distributor, FAST doesn’t benefit from much differentiation factors.

Not to mention that online companies like Amazon (AMZN) could invite themselves to the industrial distribution party and move things along faster in this industry.

The company is showing revenue, earnings, and dividend growth over the past five years but absolutely no stock price appreciation. This is being explained by the fact that the market went up to a 37 earnings multiple back in 2013 and is now just down slightly to under 23.

Bearish sentiment is present as short interest is moderately high for FAST with between 10 and 15% of shares outstanding currently on loan. This represents an increase in short interest as investors who seek to profit from falling equity prices added to their short positions on September 28.

ETF activity is negative. Over the last one-month, outflows of investor capital in ETFs holding FAST totaled $9.28 billion. Additionally, the rate of outflows appears to be accelerating.

Analysts and Hedge Funds Opinions

Morgan Stanley reissued an “equal weight” rating and issued a $46.00 price target (down from $50.00) on shares of Fastenal in a report on Monday, June 12th.

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

  • BidaskClub raised Fastenal from a “sell” rating to a “hold” rating in a research report on Tuesday, June 13th.
  • Zacks Investment Research cut shares of Fastenal from a “buy” rating to a “hold” rating in a report on Wednesday, June 14th.
  • Finally, Wells Fargo & Company reaffirmed a “market perform” rating and issued a $47.00 price objective (down from $51.00) on shares of Fastenal in a report on Wednesday, July 12th.

Several institutional investors have recently made changes to their positions in the stock, to name a few….

  • Balyasny Asset Management LLC cut its holdings in shares of Fastenal Company by 47.5% during the second quarter. The fund owned 326,160 shares of the company’s stock after selling 295,280 shares during the quarter. Balyasny Asset Management LLC owned about 0.11% of Fastenal worth $14,198,000 as of its most recent SEC filing.
  • On June 30, 2017 Geode Capital Management, Llc sold 279 shares from its total ownership of 26608. The value for the sale was $23000.

Insider activity…..

Over the last several weeks, several insiders have sold shares. On August 15, 2017, Michael John Dolan executed a direct sell involving 8000 shares.

Summary

Fastenal Company has a 50-day moving average price of $43.14 and a 200 day moving average price of $44.54. Fastenal Company has a one year low of $37.70 and a one year high of $52.74. The company has a market capitalization of $13.19 billion, a PE ratio of 25.21 and a beta of 1.00.


Option Trade - Activision Blizzard, Inc. (NASDAQ:ATVI) Calls

Wednesday, October 04, 2017

** OPTION TRADE: Buy the ATVI OCT 20 2017 65.000 CALL at approximately $0.66.

Sell price is left to your own judgment.

This holiday shopping season the video game industry will see new consoles making a splash, big games from hugely popular franchises and one surprise hit PC game possibly making the leap to living-room consoles.

Wall Street analysts see good times continuing for the top independent U.S. game publishers; and Activision Blizzard, Inc. (NASDAQ:ATVI), a publisher of online, personal computer, console, handheld, mobile and tablet games, fits into this category nicely, and is currently the fourth best-performing stock on the S&P 500.

NPD Group analyst Mat Piscatella says game sales will see a nice rebound from last year's disappointing numbers, owing to several hot titles and new consoles.

"It's going to be a very good holiday for the video game industry," Piscatella predicted.

IBD's Computer Software-Video Games industry group includes 13 stocks. It's ranked No. 1 out of 197 industry groups in terms of stock market performance. The group is up 78% year to date.

Activision is up 80.7% from the start of the year, as of last Thursday.

Activision Blizzard's going through a major transformation that's connecting gamers in increasingly profit-friendly ways. No longer is it making the bulk of its money by selling software in brick-and-mortar retail stores. Instead, it's selling high-margin games and add-on content that downloads directly to a player's gaming system. Last quarter, in-game purchases accounted for $1 billion of its $1.6 billion in sales.

Real-time streaming and video of gameplay content are driving record player engagement, while improving technology is producing a gaming experience that's better than ever. As Activision Blizzard leverages engagement in new ways; such as league play, more doors to revenue growth should open. Activision Blizzard's already created a league for Call of Duty, and recently, it announced the first seven "city" teams for its Overwatch League.  Eventually, these leagues could produce additional revenue from media contracts and advertising deals.

Activision Blizzard's line-up includes eight billion-dollar gaming franchises, and with 407 million monthly active users globally, there's a lot of opportunities to drive revenue higher. Sales were $1.63 billion in Q2, and that was $200 million above forecast. As we go into year-end, financials could do even better, given the launch of Destiny 2 in September and the upcoming launch of Call of Duty: WWII in November.

Activision generated more than $6.6 billion in revenue in 2016, compared to $4.7 billion in 2015.

Influencing Factors

Activision Blizzard's stock has climbed more than 400% over the last five years. Investor confidence in the game maker has grown considerably this year as Activision has demonstrated its ability to increase revenue without the help of new game releases, thanks to in-game purchases of add-on content.

There are several emerging growth avenues outside of selling games for game companies to capture, which positions Activision Blizzard to continue growing much faster than the industry average.

Investors took a positive view of the news that Activision Blizzard is venturing into eSports (professional video game competition) through a unique model built around global intercity rivalry.

Although not the pioneer of eSports, Activision is the first major video game publishers to model its eSports league around city-based global competition so that a team in Boston can play a rival team in Shanghai China, for instance.

Although researchers have come up with different estimates of the size of eSports industry, they are united that the industry is growing at a rapid pace.

Activision has a good tailwind at its back due to industrywide growth, which is expected to continue. According to Newzoo, a global leader in eSports intelligence, the eSports economy could be worth $696.0 million this year and could double to $1.5 billion by 2020.

Mobile game maker King Digital Entertainment, which was acquired by Activision Blizzard in early 2016 for $5.9 billion, has been testing in-game advertising for its mobile games, and early results look promising.

The company has discovered in its testing that players actually spend more time in the game with ads. Players also reported a better gaming experience. All of this seems contrary to conventional thinking -- that in-game ads ruin all the fun -- but apparently not.

With more than 400 million monthly active users and high levels of player engagement across its games, Activision has a significant opportunity to generate meaningful revenue and profits from advertising over time. Management expects in-game advertising to contribute to revenue this year, with a more significant contribution beginning in 2018.

Overwatch, which reached over 30 million registered players in a little more than a year after release, has been a big driver of Activision's digital in-game revenue over the last year. The high engagement level of the game naturally leads players to spend money on "loot boxes," which unlock additional content in the form of character outfits, profile icons, and other cosmetic items.

And gamers love it. Activision's revenue from in-game content more than doubled in 2016 to $3.6 billion. Speaking about the in-game content opportunity on the company's fourth-quarter 2016 conference call, Chief Corporate Officer Dennis Durkin said, "We believe we still are in the early days of this important vector in our business with more opportunity ahead."

In Q2, Activision's GAAP revenues beat management’s guidance by approximately $200 million, while the company's EPS of $0.32 beat the target of $0.15 – and we were able to profit nicely from this earnings report.  Compared to 2016, Activision's YoY EPS increased by $0.12. Due to Activision outperforming guidance, the company's management increased its full-year guidance on both its EPS and revenues - signalling management’s faith in its products and the gaming industry in general. These gains were likely driven by the video game-makers increase in monthly average users (MAU).

Analysts and Hedge Funds Opinions

Macquarie analysts are more bullish on the prospects of the eSports economy. In a research note cited by the Financial Times, Macquarie forecasts that the eSports industry could be worth $5.0 billion by 2020, up from ~$892.0 million in 2016. Macquarie has a broader view of the eSports economy because its estimates include sales of media rights, advertising, sponsorships, ticketing, merchandise, and betting.

The firm also believes that Activision’s model of intercity teams could accelerate the expansion of the eSports market.

In regard to Activision Blizzard, Morgan Stanley is also bullish on the stock; and said it expects sales from the company's Call of Duty, Destiny 2, and World of Warcarft franchises to lead to strong earnings growth over the next year, adding it's more bullish on ATVI than peer Electronic Arts.

During the past year, the shares have gained roughly 44%, touching a record high of $66.58 on Aug. 31. Moreover, security's recent pullback was contained by its 80-day moving average; which, according to history, when the stock has pulled back within one standard deviation of this trendline, occurring seven times during the past three years; and then, on such occasions have resulted in an average 21-day gain of 3.1%, with a 71% win rate.

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

  • BMO Capital Markets reiterated their market perform rating on shares of Activision Blizzard, Inc (NASDAQ:ATVI) in a research note issued to investors on Wednesday morning. BMO Capital Markets currently has a $62.00 target price on the stock, up from their prior target price of $60.00.
  • Stifel Nicolaus reaffirmed a buy rating on shares of Activision Blizzard in a research note on Sunday, September 10th.
  • Piper Jaffray Companies reaffirmed an overweight rating and set a $69.00 price target on shares of Activision Blizzard in a research note on Friday, September 8th.
  • Vetr raised Activision Blizzard from a hold rating to a buy rating and set a $64.63 price target for the company in a research note on Thursday, June 8th.
  • Finally, UBS AG reaffirmed a buy rating and set a $72.00 price target (up previously from $67.00) on shares of Activision Blizzard in a research note on Monday, July 31st.

Two research analysts have rated the stock with a sell rating, two have given a hold rating, twenty-five have issued a buy rating and one has assigned a strong buy rating to the company’s stock. The stock has a consensus rating of Buy and a consensus target price of $72.23.

Several institutional investors have recently made changes to their positions in the stock, to name a few….

First Allied Advisory Services Inc. raised its position in Activision Blizzard by 295.2% in the second quarter. The fund owned 26,944 shares of the company’s stock after buying an additional 20,127 shares during the quarter. First Allied Advisory Services Inc.’s holdings in Activision Blizzard were worth $1,568,000 as of its most recent filing with the Securities and Exchange Commission.

Victory Capital Management Inc. raised its stake in shares of Activision Blizzard by 15.0% during the first quarter. Victory Capital Management Inc. now owns 949,244 shares of the company’s stock worth $47,329,000 after purchasing an additional 123,514 shares during the last quarter.

American International Group Inc. raised its stake in shares of Activision Blizzard by 1.2% during the first quarter. American International Group Inc. now owns 285,242 shares of the company’s stock worth $14,222,000 after purchasing an additional 3,365 shares during the last quarter.

Summary

Activision looks like a solid target for short-term options traders. The equity's Volatility Index (SVI) of 23% ranks just 11 percentage points from a 52-week low, suggesting volatility expectations are relatively muted for near-term options right now. Plus, the stock has a Volatility Scorecard (SVS) of 90, meaning it's shown a tendency to make bigger-than-expected moves on the charts over the past year, compared to what options traders have priced in.

Activision Blizzard has a market cap of $48.70 billion, a PE ratio of 43.56 and a beta of 1.08. The company’s 50 day moving average price is $63.45 and its 200-day moving average price is $57.13. Activision Blizzard has a one year low of $35.12 and a one year high of $66.58.


Option Trade - Yum China Holdings Inc. (NYSE:YUMC) Calls

Monday, October 02, 2017

** OPTION TRADE: Buy the YUMC OCT 20 2017 40.000 CALL at approximately $1.40. Sell price is left to your own judgment.

Yum China Holdings Inc. (NYSE:YUMC), a firm in the Retail – Restaurants industry, will report earnings results for the third-quarter after the market closes on Thursday, October 5. Shares of Yum China have skyrocketed more than 50% this year and up almost 56% over the past 12 months, compared to a 14% gain by Yum Brands and a better than 16% gain by the iShares China Large-Cap ETF (FXI) over the same span.

Wall Street expects EPS of 55 cents on revenue of $1.98 billion. Yum China has made a bigger push in mobile payments and delivery, which made up some 40% and 13% of total sales, respectively, in Q2. However, revenue missed views during that time, and comps at Pizza Hut were weak.

However, Yum China Holdings, Inc. still surprised the stock market in its last reported earnings when it earned $0.44 a piece versus the consensus-estimated $0.38. Its revenue totaled $1.6 billion up 24.79% from the previous quarter.

Yum China Holdings, Inc. is a restaurant company. The Company’s segments include KFC, Pizza Hut Casual Dining, and All Other Segments, including Pizza Hut Home Service, East Dawning, Little Sheep and Taco Bell. As of December 31, 2016, the Company had over 7,500 restaurants in China. Its restaurant base consists of various restaurant concepts.

A Barron’s feature published last month predicted Yum China could return 30% over the next two years. As the company matures and franchises more stores, it will free up capital for dividends and share buyback.

Influencing Factors

Yum China was spun off by Yum Brands Inc. (YUM) in October, 2016. Like Yum Brands, Yum China is headquartered in the U.S., which is good, because of “Western accounting, meaning transparent accounting.”

Unlike Yum Brands, which is moving toward a franchising model for its KFC, Pizza Hut and Taco Bell restaurants, Yum China directly owns all of its 7,600 restaurants in China.

Another major difference for Yum China is that they were the first to enter China in 1987. That is a significant fact, because unlike in the States, where fast food companies rely on Sysco Corp. (SYY), to get their food, Yum Brands (now Yum China) had to build out its own distribution infrastructure.

This makes Yum China unique in the country, and underpins a competitive advantage.

The three restaurants have more varied menus than in the U.S., and that the company’s Chinese customers are not going for a fast meal. “You are dining out when you feel prosperous.”

The company’s customer loyalty in China is incredible, with 100 million fans on social media.

Currently, the 14-day ADX for Yum China Holdings is 32.79, which generally speaking, would indicate a strong trend.

The 14-day RSI is presently standing at 67.82, the 7-day sits at 72.50, and the 3-day is resting at 74.05 for Yum China Holdings which indicates internal strength for the speed and direction of its price movement.

Yum China Holdings’s Williams Percent Range or 14 day Williams %R currently sits at -14.25, which means it is neither overbought or oversold.

Analysts and Hedge Funds Opinions

Yum China Holdings‘s stock had its “buy” rating reissued by investment analysts at Oppenheimer Holdings, Inc. in a report issued last Friday. They presently have a $43.00 price target on the stock. Oppenheimer Holdings, Inc.’s target price would indicate a potential upside of 7.58% from the company’s current price.

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

  • Citigroup Inc. started coverage on shares of Yum China Holdings in a research report on Monday, September 18th. They issued a “buy” rating and a $51.00 target price on the stock.
  • Morgan Stanley reaffirmed an “overweight” rating and issued a $41.00 target price on shares of Yum China Holdings in a research report on Friday, July 7th.
  • Deutsche Bank AG downgraded shares of Yum China Holdings from a “buy” rating to a “hold” rating and upped their target price for the stock from $34.72 to $36.61 in a research report on Thursday, July 6th.
  • Zacks Investment Research upgraded shares of Yum China Holdings from a sell rating to a hold rating in a report published on Wednesday, September 13th.
  • Finally, Bank of America Corporation reissued a “neutral” rating and set a $41.60 price objective on shares of Yum China Holdings in a research report on Sunday, July 30th.

Two research analysts have rated the stock with a sell rating, six have assigned a hold rating and five have assigned a buy rating to the stock. The company has an average rating of “Hold” and an average target price of $42.00.

Several institutional investors have recently made changes to their positions in the stock, to name a few…..

  • Guardian Capital LP grew its stake in shares of Yum China Holdings by 6.0% during the 2nd quarter. The institutional investor owned 298,559 shares of the company’s stock after acquiring an additional 16,845 shares during the period. Guardian Capital LP owned 0.08% of Yum China Holdings worth $11,772,000 as of its most recent SEC filing.
  • Cibc World Markets Corp acquired a new stake in shares of Yum China Holdings in the 2nd quarter. The fund acquired 265,200 shares of the company’s stock, valued at approximately $10,457,000.
  • Fmr LLC lifted its holdings in Yum China Holdings by 7.4% in the 2nd quarter. The fund owned 6,576,492 shares of the company’s stock after purchasing an additional 455,254 shares during the period. Fmr LLC owned 1.72% of Yum China Holdings worth $259,311,000 at the end of the most recent reporting period.

Summary

Yum China Holdings stock has a market cap of $15.32 billion and a PE ratio of 29.39. Yum China Holdings has a 12 month low of $23.79 and a 12 month high of $40.63. The stock’s 50 day moving average is $37.42 and its 200-day moving average is $37.42.






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