Dear Momentum Options Subscriber,
Although earnings season is right around the corner, I wanted to do some early research on Xilinx (XLNX, $52.86, down $0.26) while shares are near 52-week peaks.
The company has matched or topped earnings estimates during three of the past four quarters by $0.05, $0.02 (match) and $0.01. Revenues have topped estimates during the past three quarters but missed by $1.58 million in the year-ago period. Gross margins have pushed 70% over the past year, which is a number that analysts will want to see sustained. A number below this level or a lowered outlook on an earnings miss could send shares sharply lower.
The good news is that we will likely be out of our XLNX trade before the options expire, as I only expect this to be a one to two week trade given the recent market volatility. In any event, earnings are scheduled to be released on Oct. 19, and the options expire two days afterwards. Current estimates are pegged at $0.55 a share on revenue just south of $578 million.
I love the technical and fundamental picture for XLNX, and analysts have been mostly bullish on the stock throughout the year. In mid-August, one of the suits-and-ties raised their price target on the stock from $55 to $65 while keeping an Outperform rating on the stock.
In June, with shares at $46, another brokerage firm reiterated its Outperform rating and $52 price target. On the other hand, at the start of the month, an analyst out of Goldman Sachs lowered their rating to Neutral from Buy and set a $51 price target. The reason cited was “limited upside,” with shares closing above $47 the prior session.
In May, the company’s board approved a $1 billion share-buyback authorization program. This was a bullish sign, and it came a few weeks after Xilinx lowered its earnings forecast and outlook in late April. Shares fell from $47.35 to close at $43.23 following the quarterly results.
Xilinx develops integrated circuits and software design tools used to in programmable logic devices. The company has been subject to takeover rumors throughout the year with Intel (INTC), Qualcomm (QCOM) and China’s Tsinghua Holdings floated as possible suitors. Earlier this year, the company filed a change in control provision, with the SEC saying that it would provide additional benefits to its top executives if Xilinx is acquired.
The chances of the company being acquired are real. However, I don’t believe that management appears anxious to sell given the terrific business it has developed and the long-term growth opportunities in autonomous driving. With a market cap of just over $13 billion, a 50% premium would value the company at $20 billion for roughly a $75 per share buyout offer.
I don’t like buying stocks on rumors, but I do like the technical and fundamental setup for Xilinx going forward.
The lack of follow-through today by the bulls has been a disappointment, and fresh levels of support will need to hold into the close to keep yesterday’s momentum intact. If the bears push lower lows and the indices break below Monday’s bottom, the selling pressure could get worse this week.
The Dow is currently down 202 points to 18,122, while the S&P 500 is lower by 22 points to 2,125. The Nasdaq is off 47 points to 5,164, and the Russell 2000 is declining 25 points to 1,210.
I have updated our current trades below, so let’s go check the tape.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 69-24 (74%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 1:35 p.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Xilinx (XLNX, $52.86, down $0.26)
XLNX October 57.50 calls (XLNX161021C00057500, $0.50, down $0.22)
Entry Price: $0.71 (9/12/2016)
Exit Target: $1.45
Stop Target: None
Action: Support is at $53-$52.50. Resistance is at $53.50-$54.
Kroger (KR, $30.87, down $0.02)
KR October 30 puts (KR161021P00030000, $0.67, up $0.05)
Entry Price: $0.78 (9/7/2016)
Exit Target: $1.60 (Limit Order on first half)
Stop Target: None
Action: Support is at $30.75-$30.50. Resistance is at $31.50-$32.
Vuzix (VUZI, $8.49, down $0.79)
VUZI October 10 calls (VUZI161021C00010000, $0.50, down $0.15)
Entry Price: $0.68 (9/7/2016)
Exit Target: $1.40
Stop Target: $0.25 (Stop Limit)
Action: Support is at $8.75-$8.50. Resistance is at $9-$9.50.
Viavi Solutions (VIAV, $7.51, down $0.17)
VIAV December 8 calls (VIAV161216C00008000, $0.35, down $0.05)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: None
Action: Support is at $7.50-$7.25 and the 50-day moving average. Resistance is at $7.75-$8.
Editor and Chief Options Strategist