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Sprint, T-Mobile Merger Under Fire

Posted: 12 Jun 2019 03:00 AM PDT

States plan legal battle ahead of DOJ approval for the carrier merger.

Shares of both T-Mobile (TMUS) and Sprint (S) struggled on Tuesday, on reports that at least 10 state attorneys general are preparing to stop the proposed merger of the company.

The combined entity would create a $26 billion carrier company. The Department of Justice was expected to make a decision on the merger later this week, with the head of the antitrust division appearing to approve of the merger.

The deal would have merged the two smallest wireless carrier companies on the market, so the prospect of antitrust action seemed low before this announcement. The newly merged company would still leave room for new competitors in the market as well.

However, it would leave only three carriers for most customers to consider, the merged Sprint/T-Mobile, AT&T (T), and Verizon (VZ). Regulators tend to view at least three companies as sufficient to avoid monopoly and antitrust concerns.

Action to take: Carrier companies are an oligopoly to begin with, which potentially makes for a great sector to park your money. With high costs of entry—to build an entirely new cell network would cost billions—any company in the space looks attractive. Sprint (S) looks like the healthier of the two companies to buy whether the merger goes through or not.

Unusual Options Activity: Tesla Motors (TSLA)

Posted: 12 Jun 2019 03:00 AM PDT

Big bet that automaker’s shares will decline this month.

At least one trader is betting on a modest decline in Tesla Motors (TSLA) between now and the end of the month.

On Tuesday, over 7,500 contracts traded on a June 28th, 2019 $210 put option for Tesla. With a prior open interest of 286, this represents a twenty-six-fold surge in volume. Shares currently trade around $217, implying a downside of $7, or about three percent, for these put options to move in-the-money before expiration.

This large bet is occurring as the company has its annual meeting. Shares of Tesla are exceptionally volatile and have a popular following. Nevertheless, shares are still down nearly 50 percent from their peak in the past year as production delays and antics by Tesla's CEO, Elon Musk, continue to distract from the business of manufacturing electric cars.

Action to take: Tesla shares continue to face some fundamental problems. While some analysts are predicting share prices as low as $10, this is a company where rational valuation can be difficult. And with a 50 percent selloff, there's also a good likelihood of a rally to recover some of that lost price.

The best bet for investors is to avoid shares. If you love the company's prospects, by all means own some, but don't put too much of your portfolio into shares.

China Plans New Stimulus Measures

Posted: 12 Jun 2019 03:00 AM PDT

China moves to bolster slowdown in economic growth.

China announced new stimulus measures on Tuesday, which helped fuel a global push higher for stocks early in the day.

The country announced that local governments are being urged to issue "special" bonds to pay for big projects. With local government debt in China seen as a big concern, the push from the state itself, and the likely backing implied by the push, has given investors one less reason to worry.

This stimulus occurs against the backdrop of the trade war. With China's large, export-driven economy potentially impacted by changes in tariff rates, mostly with the United States, the country is looking for ways to increase internal consumption.

Typically, developing countries first export products that they can provide more cheaply than other countries. China has built itself into the world's second-largest economy doing just that. But without internal consumption as well, the country's economy is prone to external economic shocks. China's growing middle class has opted to save and invest rather than consume.

With the Federal Reserve hinting at rate cuts, and with many central banks around the world already cutting interest rates, the move by China may look bullish on the surface, but also suggests that economic conditions in the country are currently weaker than they appear.

Insider Activity: Occidental Petroleum (OXY)

Posted: 12 Jun 2019 03:00 AM PDT

Two insiders make a multi-million dollar buy in the oil giant.

Two corporate insiders have just bought in over $2 million in shares of Occidental Petroleum (OXY).

On June 10, CEO Vicki Hollub bought 37,460 shares, a commitment of over $1.8 million. SVP Marcia Backus bought 10,000 shares, putting down over $480,000. The buys come after shares have slid from $54 in the past month to $47 in recent days.

Oil prices have been weak, particularly for this time of year when the summer driving season boosts demand for gasoline. As a result of this seasonal aberration, energy stocks have been moving downwards as well.

With a dividend yield now north of 6 percent, and with the company trading at just nine times earnings, however, insiders are betting that the drop is overdone and that higher prices will play out over the next few months.

Action to take: With a big dividend, shares look like an attractive buy now, while waiting for a share price recovery. As a global integrated oil company, this could even become a permanent long-term holding for any portfolio.

Speculators may want to look at a January 2020 $50 call, which could give a larger percentage gain on the order of 40 or 50 percent in the next few weeks, particularly if shares spike higher.

One Corporate Event that Creates Buying Opportunities Time and Again

Posted: 12 Jun 2019 12:52 AM PDT

There's an old market adage to buy when there's "blood in the streets." But there are plenty of ways to draw blood.

In today's litigious society, one such way is with a big lawsuit. From hot cups of coffee to weed killer that may be cancerous, it's no surprise that America still leads the world in producing lawyers who need something to do—which usually means finding someone with deep pockets to sue.

While many cases have their merits, a favorable jury will often hand out pretty sizeable sums—and that kind of news can set back the shares of a company's price. The days of the biggest legal battle of them all, regarding the tobacco companies and healthcare costs, seem long past.

But are they? In the twenty-first century, new legal battles are forming. And one place they're forming in are in the opioid space. Abuse of opioids—legally and illegally—have been on the rise for a long time, and some places are starting to go after the companies that manufacture them.

While some pharma companies have already settled with states to avoid the potential for large jury payouts, one company is bucking the trend. Johnson & Johnson (JNJ) is defending itself against the state of Oklahoma, which is suing the company on the basis that it helped to fuel the crisis.

While we don't know yet how this trial will end, we do know that these often high-visibility trails don't kill companies—although they do hurt their share price in the short-run. From McDonald's to the tobacco space, buying during times of literal trial are often the most profitable.
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