Daily Archives: August 3, 2018

Market Preview

Market Preview: Next Week More Earnings and CPI Numbers

China announced Friday it will impose tariffs on $60B in American goods if President Trump follows through with his proposed tariffs on $200B in Chinese goods. Next week will likely bring more trade barbs, and maybe some positive news. Mexico’s Economy Minister says there is a good chance Mexico and the U.S. will resolve NAFTA issues next week. Canada is also getting close to rejoining NAFTA talks.

Although earnings season is waning as we head into the first full week of August, next week still brings numbers from some heavy hitters. Slated to report earnings next week are Marriott (MAR), Disney (DIS), CVS (CVS), Viacom (VIAB), and Newscorp (NWSA). Economic numbers are light heading into the traditional vacation month, but we will get Jobless Claims and the Consumer Price Index (CPI) numbers late in the week.

Monday morning Newell Brands (NWL) delivers earnings followed by Marriott (MAR) after the close. Newell has been range-bound this year. The stock took a major hit after announcing earnings late in 2017. With margins shrinking and commodity prices rising, little is expected from the maker of Rubbermaid. Marriott has fallen off since its earnings report in May, perhaps partly because its highest growth last quarter was in its “Greater China” business. Analysts will be watching closely for any signs the recent chilly relationship between China and the U.S. is impacting that growth.

The latest numbers from the TD Ameritrade’s Investors Movement Index (IMX) will be released Monday at 12:30. The index, a sample of 6 million retail investor accounts, gives a quantitative look into recent investor behavior. The index provides information on their mood, sentiment and investing behavior. Analysts will parse the number to determine whether recent market and trade activity has spooked investors.

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Options

How To Bet Big On Banking With Options

Often make the argument that trading options is superior to trading stocks. Now, I’m not talking about investing in stocks… if your goal is to collect dividends, you obviously need to buy stocks. But when it comes to trading (short to medium-term holding periods) options are almost always the better choice.

Generally, options traders will point to the built-in leverage of using options and the ease of access to underlying assets which would otherwise be difficult to afford. However, I believe the most important benefit to options is their flexibility. Most significantly, being able to tightly define your risk parameters for any given trade is a huge advantage to using options versus stocks.

Because you can you can buy and sell both calls and puts, it opens up a massive variety of options combinations (what we generally refer to as spreads). Throw in combinations of options and stocks (covered calls, delta neutral trading, etc.), and you’ve got nearly unlimited choices.

One type of spread you’ll often see professional traders use is the ratio spread, or the ratio backspread, to be more specific. This type of trade essentially has too much risk involved to be used by most casual traders. A standard backspread consists of buying an option near the money (call or put) and selling two options in the same expiration at a higher (call) or lower (put) strike.

This type of spread is very popular because it greatly reduces the cost of the trade by selling two of the farther away options. On the other hand, the double short strike means there’s unlimited risk if the underlying asset prices moves through the strike. That’s why this is a common trade among pros but generally avoided by the casual options trader.

Nevertheless, you can still glean a lot of information from large block backspreads which hit the tape. (There are also ways to roughly emulate the trade without taking on the same amount of risk.) In fact, a very interesting ratio backspread hit my screener this past week which provides a moderately bullish take on Morgan Stanley (NYSE: MS).

The spread expires in October and was put on with MS trading at $50.72. The trader purchased 15,000 of the October 52.5 calls while selling 30,000 of the 57.5 calls. Selling double of the higher strike reduced the total cost of the spread to just $0.97.

By reducing the spread cost under $1, the trader has pushed the potential return up to $4.03 or 415% gains, with breakeven at $53.47. The spread buyer also is only risking $0.97 if MS stays below the breakeven point. However, there is considerable risk above $57.5… $1.5 million for every dollar the stock moves above that point.

Keep in mind, the trader is spending almost $1.5 million to place the trade (and stands to gain over $6 million if MS closes at $57.5 on October expiration). That’s a lot of money to put down on a three-month trade. As such, there’s clearly a strong opinion – backed by capital – that MS is going higher, but not to the moon, by October.

Let’s say you like this trade, but don’t want to expose yourself to the upside risk (or margin requirement). You can simply turn the spread into a standard vertical spread and pay $1.20 instead of $0.97.  It’s a reasonably close price to the backspread detailed above without all the risk.

So why would someone want to save just $0.23 on a spread if it comes with all that additional upside risk? First off, the strategist clearly believes MS isn’t going higher than $57.5 by October. Moreover, he or she could easily hedge the position with shares (or possibly already has done so). Finally, $0.23 doesn’t seem like a lot if you’re doing a 5-lot, but when you’re doing 15,000… well, it makes a big difference ($345,000 to be exact).

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Growth Stocks

5 Cheap Stocks to Buy Before They Soar

penny stocks

Source: Shutterstock

The stock market is a mess right now.

Ever since Facebook (NASDAQ:FB) dropped the ball on its most recent earnings report, the whole tech sector has rolled over and markets have dropped. Since the FB earnings report, the S&P 500 has shed 1.5%, while the NASDAQ-100 is off more than 4%.

The broad market volatility, however, does not change the bull thesis on cheap stocks. In the cheap, sub-$5 group, macro market movements can cause some noise in shares. But, the investment thesis on cheap stocks is predicated on huge moves higher in the long-term. Thus, near-term, macro-driven movements amount to nothing more than a side show.

From this perspective, now might be a good time to pile into some stocks under $5. These stocks are a high-risk bunch. But, they do have high-reward potential, too. Just look at the three stocks under $10 that I recommended buying in late March (Francesca’s (NASDAQ:FRAN), Express (NYSE:EXPR), and Pandora (NYSE:P).

All three stocks were considered high-risk losers at the time. Since, they have all risen by more than 30%.

With that in mind, here is a list of five cheap stocks, which I think have equally big upside potential over the next several months.

5 Cheap Stocks to Buy Before They Soar: Pier 1 (PIR)

Source: Shutterstock

Furniture retailer Pier 1 Imports (NYSE:PIR) has had a tough time getting its act together for several years.

Peer Restoration Hardware (NYSE:RH) has seen its stock more than double over the past year thanks to a red-hot housing market and robust demand for home furnishings. PIR stock, however, has collapsed by 50% during that same stretch. These problems aren’t new. Over the past five years, this stock has lost 90% of its value.

Having said that, there is visibility for a turnaround in PIR stock in the near future.

At its core, Pier 1 has been killed by rising e-commerce threats creating huge pricing and traffic headwinds. Pier 1, which stands somewhat square in the middle of price and quality, doesn’t really have anything special about the business to protect against these headwinds. Consequently, sales and margins have dropped in a big way.

But, the company recently unveiled a three-year strategic plan to turn the business around. The plan includes a re-launch of the Pier 1 brand this fall and bigger investments into omni-channel commerce capabilities and marketing.

No one knows whether or not this plan will actually work. But, home furnishings is a market with enduring demand, so that helps. Plus, search interest related to the company is actually starting to grow on a year-over-year basis, illustrating that this plan is off to a good start.

Meanwhile, PIR stock is dirt cheap. This company used to have earnings power of $1 per share. Even half of that earnings power ($0.50) would be huge for a $2 stock. At $0.50 per share in earnings power, it wouldn’t be unreasonable to see this stock hit $8 (a market-average 16x multiple).

Source: Shutterstock

Much like Pier 1, savings-king Groupon (NASDAQ:GRPN) feels like one of those companies that was loved yesterday but will be forgotten tomorrow.

But, I don’t think that’s true. I get that the savings and deals market is commoditized now. I also understand that Groupon really isn’t a household name for coupons like it used to be.

But, I’m a numbers a guy. And the numbers are pretty good here. The customer base is actually still growing (up more than 2% year-over-year last quarter). Thus, global popularity of the Groupon platform is only growing.

Meanwhile, margins are improving thanks to management’s focus on higher-margin businesses. Operating expenses are also being removed from the system, so the company’s overall profitability profile is dramatically improving (gross profit per active customer on a trailing twelve month basis was up 3% year-over-year last quarter).

Aside from the numbers, Groupon has also launched an aggressive advertising campaign with hyper-relevant Tiffany Haddish. I think this campaign will have a long-term positive effect on usage, which could drive the stock higher.

Plus, the company is putting itself up for sale, and some analysts think this company can fetch a $12 takeover price.

Put it all together, and it looks like GRPN stock could have a big time rally in the back half of 2018.

5 Cheap Stocks to Buy Before They Soar: Zynga (ZNGA)

Source: Brownpau via Flickr (Modified)

I’m not a huge fan of the mobile gaming sector. It’s a tough space plagued with competition and low margins. Plus, competition is only building thanks to social media apps becoming increasingly multi-purpose.

But, mobile gaming company Zynga (NASDAQ:ZNGA) seems to have found the key to success in the mobile gaming world.

Zynga used to be a mega-popular browser game company with tons of users. But then the company overreached by branching into games that had heavy overlap with the traditional video game market, like sports titles. They couldn’t compete in that market. Eventually, the over-extension sparked user churn, and ZNGA stock spiraled downward.

That forced Zynga to re-invent itself into something much more relevant and defensible. They did just that. Zynga has transitioned its business model from web-focused to mobile-first while narrowing its gaming title focus. This pivot has streamlined operations, re-invigorated top-line growth, cut costs and improved profitability.

Consequently, the numbers supporting Zynga are pretty good. Mobile revenue growth was 13% last quarter. Mobile bookings growth was 10%. The company also reported its biggest mobile audience in over four years, with 23 million mobile daily active users (+24%) and 82 million mobile monthly active users (+30%). Zynga also reported a net profit in quarter, versus a loss in the year ago quarter.

From where I sit, this pivot appears to be in its early stages. Mobile is a secular growth narrative, and ZNGA has developed a gaming portfolio that is focused and tailored to that growth narrative. Thus, so long as mobile engagement heads higher, Zynga’s numbers should get better. Better numbers will inevitably lead to a higher stock price.

5 Cheap Stocks to Buy Before They Soar: Arotech (ARTX)

Source: arotech.com

There is no hiding the fact that the defense sector is hot right now.

President Donald Trump came into office, upped the ante on defense and military spending, and in response, the whole world is spending more on defense and military.

Defense contractors win when this happens. That is why mega-cap defense contractors like Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA) have been on fire for the past several quarters.

But one micro-cap defense contractor that has missed out on this rally is Arotech (NASDAQ:ARTX). Over the past several years, the financials at Arotech haven’t gained any ground. Five years ago, revenues were $88 million and operating profits were $3.5 billion. Last year, revenues were $98 million and operating profits were $2.9 million.

In other words, profits haven’t risen in five years. When profits don’t go up, the stock tends not to go up. It is a simple relationship.

But, profits are stabilizing. Adjusted earnings are expected to be between $0.15 and $0.18 per share this year, versus $0.17 per share last year. When profits go from declining to stabilizing, they usually go to growth next.

And, when profits go up, stocks tend to go up.

As such, it looks like Arotech is finally joining the tide when it comes to big boosts in defense and military spending. This tide will inevitably lift Arotech’s earnings power substantially, and ARTX will rally as a result.

5 Cheap Stocks to Buy Before They Soar: Blink Charging (BLNK)

Source: Shutterstock

When it comes to cheap stocks, there are few as volatile as Blink Charging (NASDAQ:BLNK).

Over the past year alone, BLNK stock has gone from $30 to $5 in a multi-month slide, before popping from $5 to $15 in a few days. Then, it slid for a few weeks to $9, before plunging overnight to $3. BLNK stock slid to under a $1.50 in a few weeks, then rallied to over $6 in a few days. Ever since, it has slid for a few months to under $3.

This volatility won’t give up any time soon. Thus, if you want to avoid volatility, I’d say avoid BLNK stock.

That being said, if this company’s secular growth narrative surrounding building a network of electric vehicle charging stations globally materializes within the next 5 years, this stock could be a 5-to-10 bagger.

It is a big risk. But, eventually, global infrastructure will need to match demand. At that point in time, there will be some huge contracts awarded to electric vehicle charging station companies.

Will Blink be one of them? Perhaps. Tough to tell. But if they do land some big contracts, this stock could have another huge pop in a short amount of time.

As of this writing, Luke Lango was long FB, PIR, GRPN, and ARTX.

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