2015-03-13 Weekend Market Update (The Japanese Equity Rally Persists)
Weekend Market Update
The Japanese Equity Rally Persists
Today’s ORM Market Commentary is an example of what will be included in my ORM Equity/Option Trader Subscription Service for $9.99 per month. Email me at Mitchell@OptionsRiskManagement.com or tweet me @MitchellKWarren on StockTwits/Twitter if you’d like for me to notify you when it is available or if you have any other questions.
Notes: Almost 5,000 Mar $39 calls were bought during the first two hours of trading on March 5th (majority for $0.80 each). As these calls have dropped, 2,000+ were bought today for $0.45-$0.55 each. Not to mention there were sizable purchases in the May $40 (3,100+ traded) and July $38 calls (1,200+ traded) for $1.10-$1.25 and $2.69-$2.70, respectively. The $6.7B home security company trades at a P/E ratio of 17.59x (Sep16 estimates) with 6.2% EPS growth, price to sales ratio of 1.90x, and a price to book ratio of 2.13x. Mid single digit sales growth is likely to continue through the end of these fiscal year and throughout next year to $3.7B+ annually. In January, the company topped Q1 EPS and revenue estimates as subscribers grew at 13.4% to 262K. While the stock doesn’t exactly trade at a cheap valuation and does face a considerable amount of new competition coming to the market, a solid dividend yield (2.12%), share repurchase program, better than expected earnings, and a recent bullish analyst note (Oppenheimer upgrading ADT to buy with a $45 price target) make the stock or calls one to consider in the intermediate-term. The next major catalyst is their investor day on March 17th.
ADT Corp (ADT) Options Trade Idea
Buy the (ADT) Mar $38 call for $1.15 or better
Stop loss- None
1st upside target- $2.00
2nd upside target- $3.00
Details: This is a more speculative trade, but the Mar $38 calls give you a higher delta and some intrinsic value in case there is less than expected volatility for next week. Either way the options market is positioning for a move to $40+ in the near-term.
Notes: Today, Ann reported Q4 EPS of $0.12 vs the -$0.03 estimate on revenue of $647.40M vs the $627.88M estimate (3.9% year over year increase). Comps were +1% in the fourth quarter, which follows a +2.9% performance in the year ago quarter. Heavy promotional activity led to margins narrowing 350 basis points to 45.8%. The overall strong performance came as a surprise since there are at least two firms interested in buying the company. Golden Gate Capital is one of those firms and they already own just under 10% of ANN shares (single largest shareholder). Ann trades at a P/E ratio of 19.93x (Jan16 estimates), price to sales ratio of 0.67x, and a price to book ratio of 3.30x. On March 4th, 9th, and 10th, 3000+ Apr $40 calls were bought for $1.25-$1.50 each (trading around $2.00 now).
Ann (ANN) Options Trade Idea
Buy the (ANN) Apr $40/$43 bull call spread for a $1.20 debit or better
(Buy the Apr $40 call and sell the Apr $43 call, all in one trade)
Stop loss- None
1st upside target-$2.40
2nd upside target- $2.95
Details: For those just now stepping into Ann it is best to play it more conservatively via a bull call spread since the stock jumped 11% on the week.
Notes: Today’s nearly 13,000 calls traded could be related to speculation of a leveraged buyout offer of the company. On January 7th, Wells Fargo analyst said that Cabela’s is a better LBO candidate than Dick’s Sporting Goods. Barron’s said that Cabela’s could lever up its retail business, spin off its credit-card operation, sell real estate, refocus its growth strategy on less-expensive stores, or lead industry consolidation. (CAB) is growing sales by 11-12% annually and trades at a P/E ratio of 15.97x (2016 estimates), P/S ratio of 1.10x, and a P/B ratio of 2.21x. If CAB pulls back some or Monday morning (or if IV falls Monday on no news or rumors) look at buying Apr $55 calls closer to $3.00.
Top Trade Idea Of The Night (EWJ)
Notes: The Japanese equity market remains one of the best (or THE best) across the globe and this week’s bullish hammer on the test of prior resistance turned current support at $12.00-$12.20 (stop losses can be placed just under $12). The Apr 2 weekly call buyers are still holding as the ETF nears their strike price (small gains for now), so look for additional gains up to $13 in the next weeks and closer towards the measured move target later this year.
iShares MSCI Japan ETF (EWJ) Options Trade Idea
Buy the (EWJ) Apr 17 $12 call for $0.55 or better
Stop loss- None
1st upside target- $1.00
2nd upside target- $1.25
Details: By buying the Apr 17 $12 calls instead you get a delta near 0.80 and are only paying about $0.07 in time premium. Realistic profit potential is at double or better (with an additional two weeks after the Apr 2 weekly expiration).
Notes: Medtronic completed their merger of Covidien in January for $49.9B (cash and stock deal). Buying the Ireland-based company allows them to do a tax inversion (lower corporate tax rates). The stock trades at a P/E ratio of 17.07x (Apr16 estimates), P/S ratio of 4.34x, and a P/B ratio of 3.74x. Both Deutsche Bank and Goldman Sachs have a $90 price target on MDT.
Medtronic (MDT) Options Trade Idea
Buy the (MDT) Apr 17 $77.50 call for $1.25 or better
Stop loss- $0.65
1st upside target- $2.50
2nd upside target- $3.50
Notes: As noted in the chart above that Philip Morris International (PM) shares have been struggling (8,000+ Apr 17 $75 puts bought on March 10th). This has not only been due to a strong U.S. dollar, but on the increasing likelihood of a Fed Funds Rate hike later this year. Altria Group is a domestic company, so the foreign exchange issues don’t effect them as much, but the possibility of a rate hike (making their yield less attractive) and whether or not the Lorillard/Reynolds American merger is approved are headwinds facing the company. The LO/RAI merger would mean further consolidation in an industry that could use pricing pressure (also talk of raising the legal age to 21 from 18 for tobacco consumers isn’t a positive). MO isn’t necessarily cheap at 18.35x 2015 earnings, but they continue to grow EPS by 8%+ annually and sales in the low single digits. The correction in the last few weeks has brought their dividend yield back above 4%, which could put the bullish scenario (see weekly chart above) back into play.
Notes: Marathon Oil has fallen more than 37% from the September as a strong U.S. dollar and a vast supply of crude oil weigh on the company and its competition. Despite all of the obvious negatives the company has $2.4B in cash (able to pay the 3.21% dividend yield) and manageable long-term debt of $5.3B. Even as oil prices fell 4% in today’s session, MRO was able to finish strong and near the highs as rumors of Exxon Mobil, Continental Resources, and Hess being interested in Whiting Petroleum were spread later in the day. Currently the average analyst price target on MRO is $36.50, or 41%+ above the current price.
Marathon Oil (MRO) Options Trade Ideas
Buy the (MRO) Apr 17 $26/$29 bull call spread for a $0.80 debit or better
(Buy the Apr 17 $26 call and sell the Apr 17 $29 call, all in one trade)
Stop loss- $0.35
1st upside target- $1.60
2nd upside target- $2.40
Sell the (MRO) Apr 17 $24/$25 bull put spread for a $0.28 credit or better
(Sell the Apr 17 $25 put and buy the Apr 17 $24 put, all in one trade)
Stop loss reference- A move below the $24.60 level in the stock (37% chance of hitting $25 by the April 17th expiration)
Upside target- $0.10 debit or less
Maximum gain potential- 39%
Details: The bull put spread is the more conservative trade, but it does require you playing more attention to it if it does start to fall back below $25. If you are not willing to book a loss on a drop below $24.60 it can get ugly very quick, so only take it if you can stay disciplined. This holds true for any bull put spread unless you take a small position where you are okay with risking the entire spread (minus your credit). Credit trades can be consistent gains, but always have a plan in place prior to an entry.
Weekly S&P Sectors ETF Performance: Healthcare (XLV) +0.56%, Financials (XLF) +0.37%, Utilities (XLU) +0.21%, Consumer Discretionary (XLY) -0.33%, Industrials (XLI) -0.67%, Consumer Staples (XLP) -0.98%, Materials (XLB) -1.23%, Technology (XLK) -2.12%, Energy (XLE) -2.80%
Various Asset Classes: Spot Volatility Index (VIX) +5.26%, U.S. Dollar (UUP) +2.67%, Bonds (TLT) +2.61%, Dow Jones Transportation Average (TRAN) +0.42%, Dow Jones Industrial Average (DJIA) -0.60%, S&P 500 (SPX) -0.86%, Gold (GLD) -0.88%, Silver (SLV) -1.91%, Nasdaq-100 (NDX) -1.92%, Agriculture (DBA) -2.30%, Natural Gas (UNG) -3.90%, Oil (USO) -7.89%
Economic Data (3/16-3/20)
Monday: 8:30 A.M. EST- Mar Empire Manufacturing (8.8); 9:15 A.M.- Feb Industrial Production (+0.3%), Feb Capacity Utilization (79.5%); 10:00 A.M.- Mar NAHB Housing Market Index (56); 4:00 P.M.- Jan Net Long-Term TIC Flows
Tuesday: 8:30 A.M.- Feb Housing Starts (1.04M), Feb Building Permits (1.07M)
Wednesday: 7:00 A.M.- Weekly MBA Mortgage Index; 10:30 A.M.- Weekly Crude Oil Inventories; 2:00 P.M.- Mar FOMC Rate Decision (0.25%)
Thursday: 8:30 A.M.- Initial Weekly Jobless Claims (294K), Continuing Claims (2420K), Q4 Current Account Balance (-$105B); 10:00 A.M.- Mar Philadelphia Fed (7.2), Feb Leading Indicators (+0.2%); 10:30 A.M.- Weekly Natural Gas Inventories
Friday: No economic data
Earnings Reports (3/16-3/20)
Monday: Before the bell- (PAR), (CXDC), (DIIBF), (EGLT), (AGM), (JST), (KPTI), (CEL), (PKOH), (PN), (PGNX), (RDNT), (RPRX), (RVLT), (STRL), (SYN), (TSQ), (UCP), (YGE); After the bell- (ANW), (AIQ), (BDSI), (BDE), (HELI), (CWCO), (CUI), (DCO), (BOOM), (ERI), (XONE), (FTEK), (FXEN), (HCCI), (JMEI), (CALL), (MCP), (NOAH), (NES), (OMER), (PRSC), (QUNR), (ROSG), (STEM), (HEAR), (HTM), (VRNG), (WYY)
Tuesday: Before the bell- (ARCO), (BURL), (CDTI), (DSW), (FDS), (IOC), (PLUG), (RSPP), (RYI), (SKYS), (ZBRA); After the bell- (ADBE), (AEZS), (AVID), (BONE), (ABCD), (CDNA), (EVOL), (LFL), (MCUR), (ORCL), (FRSH), (ZQK)
Wednesday: Before the bell- (ATU), (ALOT), (EJ), (EVLV), (FDX), (GIS), (LEJU); After the bell- (CTAS), (CLC), (GES), (MLHR), (JBL), (KTWO), (NQ), (RENN), (SAEX), (SCVL), (SLW), (SFS), (TLYS), (WSM)
Thursday: Before the bell- (CRCM), (CATO), (FLML), (MCS), (MIK), (TECD), (TNP), (URRE), (VNCE); After the bell- (EXA), (ISNS), (MFRM), (MBLX), (NWY), (NKE), (RALY), (SMTX)
Friday: Before the bell- (CMCM), (DRI), (KBH), (TIF)