Retailers Rule the Roost, Semiconductors Sag and More…

By all accounts, last week was a busy one for Profit Catalyst Alert.

We closed out all three of our bearish put trades related to housing spending. Home Depot’s (NYSE: HD) earnings release on Tuesday was the catalyst I was eyeing for the trade. The headline number frightened me as the sales number was stronger than I expected. However, as I describe below, it seems that the company enjoyed a boost early in the quarter due to delayed purchases in March. As the quarter progressed, sales growth slowed, and management warned that second half sales growth would be difficult due to the robust hurricane and storm-related sales in last year’s second half.

I don’t usually expect to close out options trades in such short order, but the numbers were honestly not as bad as I expected. I feared the weakness in the stocks might be short-lived, inspiring the quick turnaround.

I know that there is a delay or lag between the time that I post a trade alert on the website and when you receive the text alert. The powers that be at Investing Daily are aware of this and are doing their best to speed that up.

For my part, I will try to stress essential near-term dates that might influence our options positions and suggest checking the website (if possible) frequently on those dates. I rarely issue an options trade alert before the market opens as I find it too challenging to gage reliable entry and exit prices before live trading. Most alerts post before 1 PM EST.

Remember, my price limits are the best-educated parameters that I can provide. I suggest a $.05 to $.20 band around those prices to give yourself some flexibility. In some of our options trades where volume is thin, it is usually best to choose the midpoint between the bid and the ask as a price limit. If the option is expiring soon and time is of the essence, I will be emphatic about your exit timeline.

I am not always right. Sometimes a sub misses an alert and sells at a much better price in the future. Sometimes I am right, and sometimes I am lucky. Either way, you should be aware of your personal risk tolerance so that you’re comfortable with each position.

As always, please post comments and suggestions on the site. Many of you offer terrifically helpful pointers to other members regarding trade execution and portfolio decisions. Thank you for adding value to the service.

On deck for earnings this week: ONE just one company reporting this week. This quiet will hopefully give me a chance to wrap up a few new trade ideas that I’ve been working on.

Wednesday: AM Target (NYSE: TGT) call at 8:00 AM

Around the Portfolio:

Despite two adverse events, AGCO (NYSE: AGCO)is higher than it was one week ago.

First, it was downgraded to Underweight from Neutral at JP Morgan with a $55 price target. As you may surmise, underweight is the lowest rating typically given by a brokerage firm and is tantamount to a sell rating.

Then on Friday, Deere (NYSE: DE) missed earnings estimates pretty widely, mostly due to higher raw material costs (i.e., steel). Despite beating management’s guidance for agriculture revenue in the quarter, annual guidance was raised just slightly, implying slower growth next quarter.

Deere and AGCO traded down at first but then turned green as buyers stepped in coincident with the earnings call which featured an optimistic tone from management. I am considering rolling these options forward as I think the weakness in the North American market will depress sales.

Applied Materials (NSDQ: AMAT) didn’t offer the same comfort that a competitor and customer of Ichor (NSDQ: ICHR) and Entegris (NSDQ: ENTG) offered the prior week. As opposed to Lam Research (NSDQ: LRCX) who said the trough in demand would be in September, AMAT lowered numbers pretty hard and did not call out a bottom.

The manufacturer of semiconductor wafer equipment beat current quarter estimates but guided to revenue and earnings up just slightly for Q4 versus an expectation of 20% plus growth.

As a reminder, we do not have AMAT or LRCX in the portfolio but do hold Ichor Systems and Entegris who sell to these equipment manufacturers. Their exposure is limited, however, due to higher growth areas into which they have diversified.

I am double-reviewing my assumptions to make sure I am comfortable with my price targets and will update you if any changes are necessary.

Despegar (NYSE: DESP) is making me despondent. The Latin American online travel firm missed already lowered estimates significantly. Immediately after the release one of its largest shareholders filed to sell 30 million shares.

While I expected some weakness in the numbers due to currency volatility in Argentina, the slowdown was worse than I expected. The company is profitable and has more than $5.00 a share in cash so it should stabilize here, but I am placing a $16.00 stop loss on the position.

Home Depot beat by $.21 with a slightly better than expected revenue number. The only holes I can find in the release are that the company raised annual guidance by only $.10 despite the $.21 beat. This outperformance might be due to pulling sales into the current quarter, delayed expenses that will be recognized later or pure conservatism.

The other potential cracks are that updated guidance includes $6 billion in repurchases, a beneficial event not included in prior releases.

Most analysts were upbeat on the stock. JPMorgan analyst Christopher Horvers maintained an Overweight rating and $223 price target. He highlighted in a research note that despite “nice” upside to comps in Q2, the stock traded slightly lower and believed concerns on the cycle remain a near-term overhang on the stock. He expects shares will climb the “cycle wall of worry” in the second half of the year as investors gain comfort with 2019 forecasts.

Synchrony Financial (NYSE: SYF) finally got some good news. After selling off due to the loss of its Walmart (NYSE: WMT) contract, it announced a multi-year renewal of its partnership to provide private label credit cards to Lowe’s (NYSE: LOW).

Lowe’s is one of Synchrony’s largest customers, so this renewal was significant. The stock has been added to the portfolio of several substantial hedge funds in the past quarter, a sign that some “smart money” agrees with us.

Target (NYSE: TGT) moved higher off of good news from WalMart (NYSE: WMT). The U.S.’s biggest retailer announced stronger than expected sales and earnings. Management was ebullient about the confidence of consumers.

Tapestry (NYSE: TPR) rode the consumer confidence train as well. It reported fourth-quarter adjusted earnings per share of 60c and revenue of $1.48B, both above consensus estimates of 57c and $1.47B, respectively. The company also said it sees FY19 earnings per share between $2.70-$2.80, revenue of $6.1B-$6.2B, and a tax rate of about 21%-22%. Further, the company pointed out that it is confident that FY19 will be a year of double-digit revenue growth for Kate Spade, and sees the brand approaching $2B in sales over time.

Canaccord increased its price target to $63 from $55 following strong Q4 results. The analyst said the highlight of the quarter was Kate Spade as its revenues and margins exceeded expectations.

Stock Talk

Abhi A

Abhi A

Thanks Linda for the summary. Thanks for the quick HD, LOW, and CENT trades. It was a good week last week. Decided to exit AGCO when it was 2.50. Mild profit, but I didn’t want to take a chance.



Hi Linda,

Your report this week did not include CC .

Please up date

Linda McDonough

Linda McDonough

There was no new news on CC this week. I did respond to a question from another sub about the poor action in the stock so I’ve included my response below. I have not issued any alerts about selling these options.
I am flummoxed by the action in CC. I thought I had figured out that investors were worried about auto sales yet the stock has not recovered after reporting a terrific number and giving strong guidance.
I’ve rolled the options once and considering doing it again. There’s limited short interest in the name so I don’t think there’s any demon lurking. My guess is that a big holder is liquidating for some reason, maybe redemptions or some issue that is independent of the stock. Regardless, it’s frustrating.

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