“Mentorship Program” Recommendations
- Week Beginning -
Monday, May 25, 2020

by Ian Harvey

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Option Trade – Eli Lilly and Co. (NYSE:LLY) Calls

Thursday, May 28, 2020

** OPTION TRADE: Buy LLY JUL 17 2020 155.000 CALL at approximately $2.00. (Max. $2.70)

Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.        

Preamble.....

Diabetes is a severe chronic health condition that affects about 34.2 million people in the U.S. alone, which represents approximately 10% of the country's population. Many more people -- an estimated one in three Americans -- are at risk of developing diabetes.

Fortunately, many companies develop products, like drugs and insulin pumps, which help meet the needs of diabetics. And drug manufacturer Eli Lilly and Co. (NYSE:LLY) is one such company.

The COVID-19 pandemic has spared few companies, but Eli Lilly is one pharma giant whose business is thriving amid the ongoing crisis. This drugmaker has also performed better than the broader market of late. Eli Lilly could continue to outperform the market moving forward.

Eli Lilly, earlier this month announced its partnership with Junshi Biosciences, a China-based biopharmaceutical company specializing in the discovery and development of novel therapies. Since the coronavirus outbreak, Junshi Biosciences has created multiple neutralizing antibodies to combat COVID-19.

Junshi Biosciences Co Ltd said on Tuesday that it is gearing up to initiate clinical trials to test its experimental COVID-19 antibodies together with Eli Lilly, in the U.S. and China by the second quarter of the year.

As part of the collaboration, Lilly will receive an exclusive license to conduct clinical development, manufacturing and distribution of products outside of Greater China. Junshi Biosciences will maintain all rights in Greater China.

About Eli Lilly…..

Eli Lilly is headquartered in Indianapolis, and is in the Medical sector. Eli Lilly is one of the biggest players in the market for diabetes drugs in the U.S. The company markets products including Trulicity, Humulin, Humalog, Basaglar, and others.

Eli Lilly and Company discovers, develops, manufactures, and markets pharmaceutical products worldwide. The company operates through two segments, Human Pharmaceutical Products and Animal Health Products. It offers endocrinology products for the treatment of diabetes; osteoporosis in postmenopausal women and men; and human growth hormone deficiency and pediatric growth conditions.

Earnings Report.....

With many of its diabetes and non-diabetes medicines performing well, Eli Lilly had a great first quarter. The healthcare stock's total revenue was $5.9 billion, up 15% compared to the first quarter of 2019. Also, the company's non-GAAP earnings per share (EPS) increased by 32% year over year to $1.75. Eli Lilly's financial results actually benefited from the pandemic, with the company stating that its revenue increased by around $250 million due to "customer buying patterns and patient prescription trends resulting from the COVID-19 pandemic."

Influencing Factors.....

Eli Lilly boasts a strong lineup of diabetes treatments. The best-selling of the bunch is Trulicity, whose sales continue to grow rapidly. During the company's first quarter, Eli Lilly racked up $1.2 billion in revenue from Trulicity, a 40% year over year increase.

Then there's Humalog, which is an insulin product. Humalog's sales have taken a hit of late, however. During the first quarter, revenue from Humalog was $695.8 million, a 5% decrease compared to the first quarter of the previous fiscal year. Meanwhile, Eli Lilly's Humulin, another insulin product, recorded revenue of $315.7 million during the first quarter, compared to $297.7 million during the year-ago period.

Finally, there's Basaglar -- yet another insulin product -- and Jardiance, an oral diabetes medicine. During the first quarter, revenue from Basaglar increased by 21% year over year to $303.7 million. Eli Lilly recorded revenue of $267.5 million from Jardiance, representing a 31% increase year over year.

Naturally, Eli Lilly does market medicines for other conditions. One of the most promising of the bunch is Taltz, an immunosuppressant whose revenue soared by 76% during the first quarter to $443.5 million.

Also, Eli Lilly's cancer treatment Alimta generated $560.1 million in revenue during its latest reported quarter, a 12% year over year increase.

As well, Tandem Diabetes' worldwide shipment of insulin pumps grew by 18% year over year to 17,378. And while Tandem Diabetes remains unprofitable, the company's net loss per share shrunk to $0.25 from the $0.40 recorded during the prior-year quarter.

The medical devices company has its crown jewel, the t:slim X2 insulin pump, to thank for its continued success. As Tandem Diabetes' CFO, Leigh Vosseller, said during the company's first-quarter earnings conference call: "Our success is a direct result of the growing demand for t:slim X2 and all of the benefits it offers."

Moving Forward.....

This trend is set to continue, which is why the pharma giant decided to adjust its guidance for the fiscal year 2020. Eli Lilly had previously announced that its non-GAAP EPS for 2020 would be in the range of $6.70 to $6.80, but the company now expects a range between $6.70 to $6.90.

Eli Lilly boasts a rich pipeline of potential products, many of which are in late-stage trials. Thanks to its robust pipeline, the company can continue to replenish and strengthen its lineup. 

Analysts Opinions.....

Wall Street analysts are cautiously optimistic about Lilly’s stock outlook divided evenly between 4 Buy ratings and 4 Hold ratings, which add up to a Moderate Buy consensus. The $163.25 average price target implies 11% upside potential.

So…..

Expect Eli Lilly's strong performance to persist beyond 2020 thanks to its strong line-up of medicines and its rich pipeline, which currently includes more than two dozen products.

Shares in Eli Lilly have been on a winning streak since March 23, advancing 24% to $147.56 as of early U.S. trading on Tuesday.


Option Trade – Southwest Airlines Co (NYSE:LUV) Calls

Wednesday, May 27, 2020

** OPTION TRADE: Buy LUV AUG 21 2020 37.500 CALL at approximately $2.15. (Max. $2.50)

Place a pre-determined sell at $4.30.

Also include a protective stop loss of $0.85.

Preamble.....

Earlier this year “Armchair Traders” profited from a PUT option on Southwest Airlines Co (NYSE:LUV), a passenger airline that provides scheduled air transportation in the United States and near-international markets.

Now it is time to profit from the surge being experienced in airline stocks, and particularly LUV, which seems the pick of the bunch! There are signs that the economic activity is returning to normal and promising developments in the race for the COVID-19 vaccine.

Airline stocks are surging as the government eases restrictions on social activity and travel. Executives at the airlines are confident enough in the industry’s recovery prospects that they have been buying shares of their own companies. Most of the airline stocks have risen significantly since March 23, when the S&P 500 Index hit its low for the year, before a bounce-back rally for the benchmark index began. Then again, they are still far down for 2020.

The Bullish Factors…..

Government came to the rescue as politicians see the airline sector as a cornerstone of U.S. economic security. Moreover, airlines and related businesses employ a lot of people. So the federal government readily approved $50 billion in support.

Travel is resuming looking at the number of airline passengers screened per day which has risen to around 200,000 from lows of 87,000 in mid-April. This offers “flickers of hope” for the group, says Raymond James airline analyst Savanthi Syth. While still low, travel statistics are heading in the right direction, Syth says.

Airlines have inherently higher return on capital and cash flows because of improved cost controls and pricing power. Airlines also have been able to raise capital during this crisis so they will be able to “fund their way through this” as traffic improves according to Samantha McLemore, a portfolio manager at Miller Opportunity Trust Fund.

History backs the fact that airline stocks did well after the last three financial crises: In the six months after the 9/11 terrorist attacks, the 2003 SARS outbreak, and the 2008-09 financial crisis, airline stocks rose 80%-120. Insiders buying now are hoping the past will repeat.

Earnings Report.....

Southwest Airlines last posted its quarterly earnings results on Tuesday, April 28th. The airline reported ($0.15) EPS for the quarter, beating the consensus estimate of ($0.48) by $0.33. Southwest Airlines had a return on equity of 18.92% and a net margin of 8.46%.

The firm had revenue of $4.23 billion during the quarter, compared to analysts’ expectations of $4.55 billion.

During the same quarter last year, the firm earned $0.70 earnings per share. The business’s revenue for the quarter was down 17.8% on a year-over-year basis. As a group, sell-side analysts forecast that Southwest Airlines Co will post -4.41 EPS for the current year.

Influencing Factors.....

Southwest has enough liquidity to last 19 months even with no recovery in demand.

Southwest is mostly a domestic carrier, which helps, too, whereas international travel is really going to be a challenge, with business travel being reduced for years. This favors Southwest because it relies less on business travel.

Investors saw signs of normalization over the Memorial Day weekend in the U.S., with crowds flocking to beaches and other traditional vacation sites. The pandemic is far from over, and in fact it is possible all that travel could lead to a spike in future cases, but there was also good news regarding the development of COVID treatments and vaccines from Merck and Novavax.

And Southwest was upgraded at UBS from neutral to buy; with analyst Myles Walton saying the path for a domestic recovery is becoming clearer.

Moving Forward.....

Governments were also easing travel bans. Germany-based travel operator  (TUI) , which operates hotels and resorts under the Robinson, Riu, TUI Blue, Blue Diamond, and TUI Magic Life brands, helped kick off the rally by saying it planned to resume overseas flights and holidays by the end of June.

Spain said it intended to lift a two-week quarantine on foreign visitors from July 1, while Germany said recently it would lift its border controls on June 15.

Various U.S. states have begun easing their social-distancing restrictions.

Transportation Security Administration data showed that more than 340,000 travelers went through TSA checkpoints Monday. While this is down sharply from roughly 2.5 million a year earlier, the numbers have been increasing.

Analysts Opinions.....

UBS analyst Myles Walton upgraded Southwest Airlines to a “buy” rating from a neutral rating, and raised his price target for the stock to $41 from $37 in light of “a clearer path for domestic travel recovery.” In a note to clients, Walton wrote that “unlike many other airlines, the balance sheet position of LUV is remarkably clean (near-net cash balance sheet), which provides protection from any step backward in demand under another wave of COVID-19.”

"Moreover, unlike many other airlines, the balance sheet position of LUV is remarkably clean (near-net cash balance sheet), which provides protection from any step backward in demand under another wave of covid-19," said Watson.

Watson said Southwest "has the best trajectory at getting back to pre-crisis earnings and cash flow in '23/24."

Two analysts have rated the stock with a sell rating, eight have assigned a hold rating, eleven have assigned a buy rating and one has given a strong buy rating to the company’s stock. The company has a consensus rating of “Buy” and an average target price of $51.56.

So…..

Southwest Airlines Co has a twelve month low of $22.47 and a twelve month high of $58.83. The company has a debt-to-equity ratio of 0.38, a current ratio of 0.69 and a quick ratio of 0.64. The stock has a market cap of $14.69 billion, a price-to-earnings ratio of 9.31 and a beta of 1.27. The business’s 50-day simple moving average is $29.60 and its 200-day simple moving average is $46.37.