An Options Overview, In Defense of Steelcase and More…
Hello, Subscribers new and old:
Whew! It has been a busy week with some of our option recommendations keeping me on my toes.
As we have many new subscribers this week, I’d like to give a quick review of how I incorporate options suggestions into my recommendations.
In no way is Profit Catalyst Alert an “options-centric” service.
However, my experience as a hedge-fund analyst and portfolio manager has honed my abilities to offer you bullish and bearish trade ideas, which include options trades.
Bullish ideas are presented as a long stock recommendation, ie, “buy this stock.” If the stock trades options, I will usually offer a long call option recommendation for those that like to trade options.
Bearish ideas are presented only as long put recommendations, ie, “buy this put.” I do not offer short sale recommendations as the risks are enormous. A short position in a stock has unlimited loss potential and often requires paying interest (a borrow fee) on the stock you must borrow to initiate a position.
My most recent trade recommendation is this morning’s bearish agriculture equipment trade (Betting Against the Farm). As the trade coincided with a weak day in the market, this made executing the trades near limit prices difficult.
That is fine. While my “limit” suggestions are not cast in stone, I do not recommend chasing options. Most subs find if they are patient, they fill positions within a few days. The Lindsay (NYSE: LNN) trade is a bit different as it reports this Thursday, but usually, we have several weeks of leeway to execute the trades.
I never recommend naked sales of puts and/or calls. Many other services recommend selling covered calls, which is an entirely different proposition. I will leave that expertise to them and keep my suggestions more simple.
Importantly, when I issue a sell recommendation on a call position, as I did with our very profitable Tapestry (NYSE: TPR) call, that is NOT a bearish call. The same goes for selling the Chemours calls, which were not profitable.
Options have expiration dates and are quite volatile. If we have a sizeable gain in an option, I will almost always suggest booking that gain. When unprofitable option positions are nearing their expiration date, I am trying to be more proactive in selling them so that you can recover some of your capital.
Please do keep posting comments and suggestions on the site. I try to answer as quickly as possible but am sometimes on conference calls or knee-deep in research so you might see a delay.
Around the Portfolio:
Chemours (NYSE: CC) announced a global price increase of up to 15% for all grades of Vazo effective July 1, 2018, or as contracts allow.
The stock has been in the recommended portfolio since March 2018, and my confidence in the company’s prospects remains strong. I suggested selling the July calls and rolling those proceeds (although meager) into the October series with the hopes of capturing some profits in what I expect to be upside movement in the stock.
Management recently noted a new channel of demand opening up for its environmentally sustainable Opteon refrigerant. Although the company might see less demand from European auto manufacturers due to the passing of mandate deadlines, a new wave of demand is emerging from U.S. automakers and European commercial refrigerator customers.
Management specifically called out 20,000 European supermarkets that they expect to be using Opteon by 2020.
Also, revenue and profits from its Titanium coatings chemical are skyrocketing. Revenue from this product line now makes up almost half of Chemours’ revenue and grew 26% last quarter. Higher volumes and pricing are driving profits up even faster for this segment.
Despegar (NSDQ: DESP) has been one difficult stock. Last week it was down over 20% since my April recommendation despite no new news. I have not found anything concrete to explain the weakness in the stock but have several theories, none of which change my bullish thesis on it.
1. The weakness in the Argentine Peso and the Brazilian Reais are the most likely culprits for the soft stock. Most of DESP’s revenue is in these currencies which get translated into U.S. dollars. When those currencies fall, as they have been, this translates into less U.S. dollars for DESP. However, expenses also fall, so the net result is usually not very dramatic. (this theory is likely spot-on as the stock’s rally coincided with a rally in the Argentine Peso).
2. DESP’s IPO priced at $26. 12.7M shares were sold at this price. As the stock fell below this price, many funds who were perhaps not as committed to the name and sold the shares as they fell to a loss. (Many big funds get allocations of IPOs that they don’t know much about and are what I consider “loose” owners, that is, less loyal).
Omnicom (NYSE: OMC) where we held put options was initiated with a Sell at MoffettNathanson and a $63 target. Despite this super-bearish initiation, the Teflon stock refused to budge. I was forced to sell the puts at a significant loss.
As with all losing trades, I dissected this one to learn from my mistakes. The lesson on this blunder is the strong free cash flow. As with many slowing businesses, cash flow rebounds as companies need less capital to invest. I’ll keep this in mind for future trade ideas.
Steelcase (NYSE: SCS) reported a solid first quarter and robust second-quarter guidance yet the stock fell 10%. Although revenue guidance of $878 million for the second quarter includes a recent acquisition, the number is still $15-20 million higher than estimates before incorporating the new purchase.
My best guess is that investors worried about product margins and the detrimental effect of higher steel prices on those margins. CEO James Keane addressed margin worries below:
“We also see a shift in our business from very profitable, fully depreciated legacy products to new products with lower initial margins. This is normal, and we fully expect these new products will continue to become more profitable and reach target profitability as volume builds. And of course, these new products are another factor helping us to improve our win rates. What isn’t normal is the sudden and significant increases we’re seeing in the cost of steel and some other commodities, including freight.”
The company has put in place price increases to cover the higher steel cost. I believe the somewhat temporary jump in raw material (steel) prices is overshadowing the long-awaited acceleration in Steelcase’s revenue growth and think it’s a great buy at these levels.
Systemax (NYSE: SYX) got clobbered last week. Sidoti, of the few brokers to cover SYX, downgraded the stock to neutral on valuation last week. His target was $36, and when the stock rose above that level, he downgraded it. You can see my notes from last Monday’s weekly update that I increased my target on SYX from $36 to $44 after reviewing the updated numbers.
I do not have access to his report so unfortunately do not know what his assumptions are on the stock. My best guess for the harsh treatment of the stock is just that it is not widely followed and is thinly traded. I still like it very much.