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Bank of America Merrill Lynch Cautious on Home Depot After Earnings

Posted: 21 Aug 2019 03:00 AM PDT

Bank rates retailer as neutral against outperform consensus.

On Tuesday, Home Depot (HD) reported earnings and revenue that beat analyst expectations. However, the company reported that its fiscal year 2020 targets would be pulled back, and that comparable sales would likely increase by only 4 percent against expected increases in the 4.5 to 6 percent range.

This led Bank of America Merrill Lynch to reiterate their neutral rating on the company at present. Most analysts bullish on the stock give it an average rating of outperform.

BAML cites that lower interest rates could increase housing turnover, but that would have little impact on comparable sales at Home Depot. The slowing rise of comparable sales is likely to weigh on the company's profitability going forward.

Action to take: Home Depot is another great company trading a little richly right now—and one that generally trades with the overall market. That means that traders could buy a put option now to play on the issues raised by BAML—say a January 2020 $210 put option.

Longer-term traders should have the patience to buy shares on one of their periodic drops under $200 per share, a price that will give investors a 2.7 percent yield and a chance to make back the money they spend on all their weekend projects.

 

Unusual Options Activity: Johnson & Johnson (JNJ)

Posted: 21 Aug 2019 03:00 AM PDT

Surge in put-buying indicates drop by the month's end.

On Tuesday, over 4,700 contracts traded on an August 30th $123 put option on Johnson & Johnson (JNJ). The bet, with shares of the healthcare giant trading around $131, implies a 7 percent drop by the end of next week.

The option, with a prior open interest of around 150, saw volume increase by 32-fold as a result of the surge in trading.

The company could certainly see shares drop that quickly. In the past year, a number of claims have been made against the company and its myriad of products, leading to high-publicity lawsuits. One of the most recent claims was that the company's talcum baby powder was responsible for a rise in cancers.

Action to take: With a 52-week low of shares around $121, this option looks like an interesting bet—especially as a way to hedge against the market. However, we would prefer to go out a few months for the trade to play out, as the $0.50, or $50 per contract on the August 30th puts could quickly evaporate.

A January 2020 $125 put option, while more expensive at around $440 per contract, could give investors a nice hedge against a market decline in the latter half of the year.

At current prices, and with the big lawsuits hanging over the company, we prefer to wait and see how these issues resolve before considering shares a buy and going long the shares.

 

 

Insider Activity: Lumber Liquidators (LL)

Posted: 21 Aug 2019 03:00 AM PDT

Chief Legal officer makes six-figure buy.

On Monday, August 19th, Michael Reeves, Chief Legal Officer at Lumber Liquidators (LL), bought 14,900 shares, a stake that cost nearly $124,000. The buy increases his stake in the company by 50 percent.

This is the third buy by insiders in 2019, including a 14,000 share purchase by the company's CEO, Dennis Knowles on August 8th, at a similar price. Insiders have been inactive in the stock between 2015 and 2018, with no insider trades recorded.

Lumber Liquidators sells hard-surface flooring, flooring enhancements, and accessories, from various hardwood species of lumber, laminates, vinyl, porcelain, bamboo, cork, and other products. The company operates 413 stores for its products, and also offers home delivery and installation services.

Action to take: The company's poor operational performances and negative media coverage for how it sources and treats its product makes shares look unattractive, even if a bounce is likely now that shares have fallen by over 50 percent in the past year. While we like the insider buys, and a buy from the company’s legal expert says there may be no big legal issues ahead, operational turnaround would be better before making an investment either way.

Based on the long-term slide in shares, which still doesn't have any indication of turning around, speculators may want to look at the January 2021 $5 call options. Trading for around $90 per contract, they could be worth more if the company faces more negative coverage or files for bankruptcy.

 

Imperial Capital Trims Outlook on Disney

Posted: 21 Aug 2019 03:00 AM PDT

Football season to pinch ESPN revenues.

On Tuesday, Imperial Capital cut its price target on The Walt Disney Company (DIS) to $140 from $147, citing a tougher college football schedule.

The company's ESPN division, a key revenue driver for a firm better known for a cartoon mouse and theme parks, has been a source of concern over the years as revenue has declined. Imperial Capital also sees further declines in Disney's direct-to-consumer business.

Shares of Disney have also traded weakly in the past few days as a whistleblower report indicated that the company was overstating revenues at its theme park division—a claim the company was quick to deny.

Action to take: We like the company, but not at current prices, where shares trade at over 23 times earnings.

While Disney has been good at growing its revenues in recent years, it has mostly done so through acquisitions. The company's rising debt over the past few years has been a concern, and shares have rallied heavily on the yet-unreleased Disney+ streaming service, which may not play out as market bulls intend.

Shares are a buy under $125, well below the current $133, based on the various issues the company faces right now. Speculators may want to look at short-term put options to trade on further market weakness.

 
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