Dear Momentum Stocks Weekly Subscriber,
Geopolitical concerns overshadowed earnings and economic news last week as the bulls and bears battled over near-term support and resistance levels.
The top of the trading ranges stayed intact, and the higher highs and higher lows were bullish leading into Thursday’s action.
Greece was the word that was worrying Wall Street last week, along with the ongoing saber-rattling between Ukraine and Russia. However, these issues eased after Thursday’s close and into the three-day weekend as the bulls reached fresh all-time highs.
The Dow advanced 47 points, or 0.3%, to end at 18,019 on Friday. The blue-chips traded to a high of 18,037 shortly after the open before a late-day fade to 17,961. The bulls cleared resistance at 17,900-18,000 but fell just shy of the all-time high of 18,103 reached on Dec. 26, 2014. Once cleared, a run to 18,300-18,500 could come on an overshoot. Fresh support is at 17,800-17,600 and the 50-day moving average.
The S&P 500 advanced 8 points, or 0.4%, to settle just below 2,097. The index went out near its session high following an intraday dip to 2,086. The bulls powered past the previous all-time high of 2,093 and came within a stone’s throw of tripping 2,100. Continued closes above this level could lead to 2,125-2,150 over the near term. Support is moving up and now lies at 2,075-2,050 on a pullback. A close below 2,040 and the 50-day moving average might signal a short-term top is in.
The Nasdaq soared 36 points, or 0.8%, to close just under 4,894. Tech took a little while to get going but held positive territory and the 4,850 level during the first half of trading. The bulls made a serious run at 4,900 ahead of the weekend and remain on track to trip 5,000. Continued closes above this level could lead to 5,050-5,100. The all-time was reached in March 2000 following an intraday high of 5,132.52 and an all-time closing high of 5,048. Support is at 4,850-4,800. A close below the latter could lead to a quick test to 4,725-4,700 and the 50-day moving average.
The Russell 2000 advanced 6 points, or 0.6%, to finish at 1,223. The small-caps tested the previous all-time high of 1,221 on the open before a drop to 1,215 shortly afterwards. The one-point drop and reversal to 1,220 lasted into the second half of trading before a final hour surge to an all-time intraday high of 1,223.74. Continued closes above 1,225 should lead to a short-term climb to 1,235-1,250. The bulls will try to hold 1,215-1,210 on weakness, and any dips back below 1,200 need to be watched. Additional support is at 1,190-1,185 and the 50-day moving average.
The S&P 500 Volatility Index ($VIX, 14.69, down 0.65) dropped 4% and closed below 15 for the first time in 2015. I mentioned that a close below 15 would confirm higher highs, and the bulls made me look good on that prediction. The next layer the VIX needs to get below is 13.50-12.50, which are levels I believe can be reached over the near term. The bears will be looking to force the action back above 15, and any spikes past 17.50-18.50 would signal a change in momentum.
The problems with Greece are nothing new, as the country seems to get a yearly bailout from its European creditors, but they do worry Wall Street. Coming into last week, the fear was that Greece would leave the eurozone once again, but it softened its stance after agreeing to enter negotiations with its international lenders.
The ceasefire agreement between Ukraine and Russia was also good news and gave the bulls additional firepower. While doubts remain on how quickly Greece can reach a deal or how long cooler heads can prevail, it was enough to get the bulls over the hump.
There have been predictions and debates as to whether oil can test the $20 level at some point this year, but I would be shocked if it does. It would be great for gas prices, as a gallon of gas might push $1.00 if that were the case. While some of the bigger conglomerates say lower oil prices won’t help them out for another six months, I think they were underestimating and sand-bagging their numbers for future quarters and year-end guidance.
I covered Brent Oil ($BRENT, $61.58, up $2.19) last week and mentioned that a bottom may have formed with near-term support at $55. The close above $60 and the 50-day moving average could quiet talk of $40 oil, or even $20 oil, for a while.
The Financial Select SPDR (XLF, $24.43, down $0.02) showed continued strength last week after holding the 50-day moving average and making a move past $24.50. There is additional resistance at $24.75-$25, and a close above the latter would signal a possible breakout.
The XLF March 25 calls (XLF150320C00025000, $0.21, down $0.01) were at $0.17 coming into last week, and I mentioned that they were a “cheap” way to play a rebound. The 52-week high for the XLF is at $25.14. At $25.34, these options would double from their profiled price if this level were reached by mid-March.
American Express (AXP, $78.08, down $2.40) fell another 3% on Friday following Thursday’s 6% drop from $86 to $80. Shares have been punished following the news that Costco Wholesale (COST, $147.10, down $0.66) and the company would end their 15-year long merchant acceptance agreement. While shares are starting to look attractive at current levels, there is further risk to $75 on a close below $78.
The Dow traded to a low of 17,037 on Feb. 3 intraday and coming into the month I said to expect a 1,000-point move. With the index reaching a high of 18,037 on Friday, I would say that prediction was pretty accurate.
I would like to see a continued run to all-time highs for the rest of February, but I also mentioned that it’s a tricky month to trade. Fortunately, I’ve been nimble during the four-month trading range and didn’t fall for the catcalls for a complete selloff following the October, December and January pullbacks.
I have said all along that the bulls have not come this far not to challenge the all-time high in Tech. While the catcalls for Nasdaq 5,000 will come quickly, I will be more interested in the Nasdaq’s run to 5,500-6,000 this year.
I usually make my “official” year-end market predictions in February and, for the past two years, they have been money. I predicted the Dow’s move from 13,000 to 16,000 in 2013 and the S&P’s run from 1,848 to nearly 2,100 last year.
I will cover the 10-year charts in more detail next week, but I covered them in early December, and again in January, and gave these upside targets for the major indexes in 2015:
- S&P 500: 2,300-2,400
- Dow: 19,000-20,000
- Nasdaq: 6,000
- Russell: 1,300-1,400/1,450
The suit-and-ties will be under pressure to get back on the bull bandwagon, as I have said that fund managers will need to start showing performance. However, I’m a little worried there could be a week or two of consolidation before another run higher.
The day after President’s Day has been bearish in recent years, and this is February option expiration week. February expiration day (this Friday, Feb. 20) has been a bull-killer during the past 15 years, as the tech sector has fallen in 12 of them. This is an 80% win rate for the bears during this time frame.
A higher close for the indexes today, a continued decline in the VIX and another up-Friday would signal continued bullish momentum this week and a run to the upper near-term targets I have listed for the indexes.
A lower Tuesday and Friday, along with a rising VIX, could signal another week or two of a continued trading range.
From desk to press, futures look like this: Dow (+4); S&P 500 (-1); Nasdaq 100 (+7).
Rave Reports 2Q Earnings
Rave Restaurant Group (RAVE, $13.57, up $0.28) recently reported second-quarter (2015) earnings that have masked the company’s turnaround and have kept Wall Street uninterested in the stock. However, by digging deeper into the company’s books and knowing its story, it’s given me an opportunity to discover a gem the suit and ties would love to find yet continue to ignore.
Rave posted a quarterly loss of $0.04 a share on revenue of $11.1 million. The quarterly losses will likely continue for 2015 and there are only two more quarters left for the company’s fiscal year. Most companies are, or have, currently reporting fourth-quarter numbers but Rave is on a different calendar year due to when the company incorporated. This is important to remember because I expect Rave to turn a profit starting in fiscal year 2016.
I read the company’s 8-K quarterly report during the weekend and found some good information concerning the number of shares outstanding along with its market capitalization.
The company is authorized to sell 26 million shares and currently has more than 9 million outstanding and another 9 million potential dilutive shares. There are over 7 million additional shares in Rave’s treasury chest, and shares could come to market if it needed to raise capital.
Rave recently filed paperwork to sell additional shares to market, from time to time, and it could use the offerings to help fund its rapid growth, if needed. However, don’t expect Rave to “flood” the market with fresh stock as it only “received” $1.7 million in stock proceeds last quarter.
Although Rave reported a loss for the quarter, the balance sheet is improving. The company has a little more than $2 million in cash (and equivalents) and another $2.7 million in accounts receivable.
My original enthusiasm for recommending Rave shares at under $5 starting in 2012 was based on the rapid growth that would come from their Pie Five’s growth. Luckily, I visited my first location when the stock was below $8 but I hadn’t tried the pizza. I added additional shares to my portfolio while it was still in the single-digits after trying a nearby location in Richmond, Virginia.
While I may not be a whiz at analyzing a company’s balance sheet, I like buying stocks in products, foods, or businesses I know, like, and understand. Pizza can be a crowded field but it’s the trend, quality, service, and personal experience that separate the chains.
I have commented on Rave’s decision to revive its Pizza Inn locations and, while this was good news, it has weighed a little on the books. However, I mentioned management was excited about the turnaround and is in the process of renovating and reviving the brand and food. These are “buffet style” locations but also have the ability to do delivers and carry-out. There are currently 252 Pizza Inn locations, worldwide.
Pie Five is fast-casual, and Rave signed four more multi-franchise development agreements to bring another 72 Pie Five restaurants into its portfolio. This gets the “official” total to 329 restaurants on board and I have talked about the CEO’s plans to open 400-500 Pie Five’s during the next three to five years.
Rave expects to end fiscal year 2015 with 60-70 Pie Five locations with 22-25 company owned. This means by the end of this June, the company will have 325 Pizza Inn and Pie Five established locations.
These numbers are important because I’m getting to a point.
I mentioned Shake Shack’s initial public offering a few weeks ago for a reason and to compare burgers to pizza. At the time, I mentioned many on Wall Street were already commenting Shake Shack is an “over-priced” stock with a high valuation on only 63 stores. More importantly, the company said that it only planned to open 10 U.S. restaurants a year and probably not this many internationally. Shake Shack is striving to have 450 units but did not give a specific time frame.
The current market capitalization for Rave is roughly $136 million compared to $460 million for Shake Shack.
While Rave’s Pizza Inn brand won’t grow as rapidly as the Pie Five name, these restaurants are already up and running and posted a 6.4% increase in domestic sales. Meanwhile, Pie Five sales increased 118%, and average weekly sales increased 31.6%, year-over-year. Overall, total revenue from both chains increased 11% year-over-year.
With more Pie Five locations coming on board and a renewed interest in capturing the pizza buffet experience, Rave is on its way to turning the corner. The market cap for Rave, was under $70 million coming into 2015 and while it has nearly doubled, shares still have room to run.
I have said shares could trade to the mid-teens over the near-term and could trade to $20 during the next 12-24 months. While this price target might seem aggressive, I would rather own shares of Rave than some of the recent restaurant IPOs. Rave is still an undiscovered and undervalued stock that has another 50% upside (at least) for those of you that feel it’s too late to get in.
Momentum Stocks Weekly Play List
All prices given in this update are current as of Feb. 13, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 1-0, for a 100% win rate (118-17, or 87% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Western Union (WU, $19.02, up $0.71) Option Trade
WU May 20 calls (WU150515C00020000, $0.47, up $0.18)
Entry Price: $0.41 (2/13/2015)
Exit Target: $0.80-$1.00
Return: 15%
Stop Target: None
Action: The option volume was exploding in Western Union on Friday. Shares reached a 52-week high of $19.02 and look poised to clear $20.
Strong option volume is usually a good indicator that Wall Street, or the “smarter” traders, are expecting continued higher highs in a stock. Buying options is also “cheaper” than buying the stock and it allows you to “control” 100 shares of stock for each option contract you purchase.
To buy 100 shares of Western Union on Friday, it would have cost nearly $1,900. To buy 10 option contracts of the calls I recommended, the cost was just over $400. Of course, there is much more risk with buying options because you still don’t “own” the stock but you do have leverage, and that is the beauty of options.
With the February and March call chains exploding last Friday, I used the May calls to give this trade much more time to play out. The WU May 20 calls have three months before expiration and this provides plenty of time for shares to make a run past $20.
If Western Union reaches $20.80, these call options will be worth a minimum of 80 cents and would represent a 100% return from the entry price. At $21.25, the calls would be “in-the-money” by $1.25 and would have the trade up 200%.
To get the same returns on the stock, WU shares would need to trade to $40-$60. That would be a lot to ask from Western Union although I do believe the company could be a takeover candidate this year.
A premium on Western Union of 50% would have shares near $30 and its why I believe a run to the low $20s is not out of the question.
I also thought about using LEAPS options for this trade which are a fancy way of describing longer-term options that expire in nine to 12 months or one to two years out. For instance, you could trade the Western Union January 22 (2016) calls (WU160115C00025000, $0.45, up $0.15) for shares to make a possible run to the mid-$20’s. At $23, these options would be worth $1 for a 100+% return if this level is reached in 10 months.
You can even trade the Western Union January 22 (2017) calls (WU170120C00022000, $1.00, up $0.10) that have nearly two years before expiration. These options would double if shares reach $24 my mid-January 2017.
The risk to this trade is if shares stay below $20, or more importantly, $20.41, as this is the “break even” point for this trade. A close below $20.41 by mid-May would result in a loss for the position.
I don’t carry stops on options that trade for under $1.25 so plan to hold these options until May, or until we get a triple-digit return.
The company recently beat Wall Street’s earnings expectations by 8 cents after reporting earnings of $0.42 a share on revenue of $1.47 billion. This represented the fourth-straight quarter WU has beat or matched Wall Street’s expectations.
For 2014, the company posted a profit of $1.59 a share versus forecasts for $1.50 a share. The results represented a year-over-year earnings improvement of 11%. For 2015, WU is expecting earnings between $1.58-$1.65 a share.
The company upped its quarterly dividend by 24% to $0.155 cents, or $0.62 per year. The next payout is scheduled for the end of March to investors that own the stock by St. Patty’s Day.
Western Union’s management also realized its shares were undervalued and signed-off on a new $1.2 billion three-year share repurchase program. This shows faith in the company’s improving fundamentals.
Near-term support is at $18.50-$18.25 on a pullback. A close below $18-$17.75 and the 50-day moving average would suggest momentum has peaked.
The six-year chart shows clear resistance at $20 with room for a run to $22.
The 10-year chart shows a surge to $24-$27 could come if $22 clears.
Array BioPharma (ARRY, $8.05, up $0.08)
Original Entry Price: $8.17 (2/12/15)
Lowered Price from Selling Options: N/A
Exit Target: $9.10 (Limit Order)
Return: -1%
Stop Target: $6
Action: Set a Limit Order to close the trade at $9.10.
I have a near-term target of $9+. Shares could make a push into double-digits but I mentioned this was a short-term momentum trade. Support is at $7.75-$7.50 on a pullback. A close below $7 would be bearish.
BlackBerry (BBRY, $10.09, up $0.23)
Original Entry Price: $10.03 (1/29/15)
Lowered Price from Selling Options: N/A
Exit Target: $12+
Return: 1%
Stop Target: $8
Action: BlackBerry traded down to $9.76 midweek but held support at $9.75 and the 200-day moving average. A close below these levels could lead to retest of $9.50. Shares cleared $10 again ahead of the three-day weekend after going out at their session high. Near-term resistance is at $10.25-$10.50 and the 50/100-day moving averages. A move above these levels could lead to a run to $11-$11.50.
New subscribers can feel comfortable opening positions at current levels.
Bank of America (BAC, $16.61, down $0.06)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.33
Exit Target: $20+
Return: -4%
Stop Target: $15
Current Dividend Yield: 1.3%
Action: Shares kissed $16.79 and tested the 100-day moving average on Friday. A close above this level should get $17-$17.25 in play and where I will look to possibly write another call option against our shares. Support is at $16.25-$16 and the 200-day moving average.
We previously sold to open the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
JDS Uniphase (JDSU, $13.26, up $0.23)
Wrote the JDSU February 15 calls (JDSU150220C00015000, $0.05, flat)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: $13.77
Exit Target: $18+
Return: -4%
Stop Target: $10
Action: The JDSU February 15 calls expire this Friday. Assuming JDSU shares stay below the $15 strike price for our calls and we keep our shares, I will look to sell another near-term option once shares clear $14 again.
JDSU reclaimed its 100-day moving average last week and traded up to $13.29 on Friday. A close above $13.40 and the 50-day moving average would be bullish for a run to $13.75-$14. Support is $13-$12.80 on weakness.
New subscribers can initiate positions at current levels.
We previously sold to open the JDSU February 15 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $13.77. If shares are called away at $15 this Friday, the trade will make 9%.
Brocade Communications Systems (BRCD, $12.56, up $0.50)
Wrote the BRCD February 12 calls (BRCD150220C00012000, $0.70, up $0.25)
Original Entry Price: $11.47 (12/5/14)
Lowered Price from selling options: $11.07
Exit Target: $15+
Return: 13%
Stop Target: $10
Current Dividend Yield: 1.2%
Action: The BRCD February 12 calls expire this week. The trade will be “called-away” if shares stay above $12 following this Friday’s close.
The previous 52-week high was $12.43, and shares closed a penny off their session high. Brocade is at multi-year highs but before I show you the longer-term chart, here is the short-term snapshot:
Near-term support is at $12.25-$12 on a pullback with additional help at $11.75 and the 50-day moving average.
The 20-year chart is what’s exciting about this trade. However, don’t get too giddy about the breakout north of $100 way back when because I doubt shares are headed anywhere near that level anytime soon. However, I do believe a run to the mid-teens could be coming.
Earnings are due this Thursday, and Wall Street is looking for a profit of $0.24 a share on revenue just south of $570 million. The spread on the high/low estimate is $0.23-$0.25. This could mean a penny beat or miss.
During the past four quarters, the company has topped or matched expectations by 1 cent, 4 cents, 0 cents and 4 cents, respectively. The high estimate on revenues is $573 million so I’d like to see an earnings beat with sales north of $575 million. Raised guidance for the current quarter would also be nice.
An earnings miss could have a negative impact on the stock.
We previously sold to open the BRCD February 12 calls for 40 cents on Jan. 2, 2015, to reduce the cost basis to $11.07. If shares are called away at $12 this Friday, the trade will make 8%.
AT&T (T, $34.66, up $0.05)
Wrote the T February 35 calls (T150220C00035000, $0.10, up $0.01)
Original Entry Price: $33.88 (12/5/14)
Lowered Price from dividends/ selling options: $33.60
Exit Target: $40
Return: 3%
Stop Target: $30
Current Dividend Yield: 5.5%
Action: The T February 35 calls expire this week. The trade will be “called-away” if shares are above $35 following this Friday’s close.
Shares traded to $35.07 last week but finished below resistance at $35. My near-term target is calling for a run to $37 by mid-March. The 52-week high is at $37.48. Support is at $34.25-$34 and the 200-day moving average.
We previously sold to open the T February 35 calls for 28 cents on Jan. 2, 2015, to reduce the cost basis to $33.60. If shares are called away at $35 on Friday, the trade will make 4%.
Discovery Laboratories (DSCO, $1.43, up $0.05)
Wrote the DSCO April 2 calls (DSCO150417C00002000, $0.25, up $0.05)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Return: 19%
Stop Target: None
Action: Shares held support at $1.30 throughout last week and the 50-day moving average. Resistance at $1.40 was tested and cleared on Friday’s pop to $1.45. A close above $1.50 and the 100-day moving average would be bullish. Support is at $1.35-$1.30 on a close back below $1.40.
I still like the position at current levels but I would wait to write the DSCO April 2 calls against the shares until I give the green light if starting new positions.
On Nov. 11, 2014, I suggested buying DSCO at $1.60 while selling to open the DSCO April 2 calls for 40 cents. This lowered the cost basis of the trade to $1.20. If shares are called away at $2 by April, the trade will make 67%.
Rave Restaurant Group (RAVE, $13.57, up $0.28) Stock Trade
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: Raise from $12 to $20
Return: 70%
Stop Target: Raise from $10.50 to $11 (Stop Limit)
Action: Raise the Exit Target from $12 to $20. Raise the Stop Limit from $10.50 to $11.
Shares traded down to $12 ahead of the company’s earnings release and again afterwards. Fresh support held at this level before a surge to $13.37 by Thursday’s close.
The previous 52-week high of $13.49, set at the beginning of the month, was cleared on Friday’s surge to $13.93.
RAVE is my No. 1 stock pick for 2015. New subscribers should read all of my January and February updates to get the entire story on RAVE.
Huttig Building Products (HBP, $3.20, up $0.02) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -20%
Stop Target: $2 (Stop Limit)
Action: The current trading range of $3.10-$3.40 has lasted six weeks. Resistance is at $3.30-$3.35 and the 50/100-day moving averages. Support is at $3.10, and a close below this level could lead to $3-$2.75.
Read my original write-up for HBP by clicking here.
Limelight Networks (LLNW, $2.99, flat) Stock Trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: None
Exit Target: $5
Return: 0%
Stop Target: $1
Action: Shares were in a tight range last week after trading between $3.03-$2.92. I could open a covered call this week to lessen the cost basis. If I do, I will send out a Trade Alert.
The 52-week high is at $3.25 and could trigger on continued closes above $3-$3.10. The five-year chart shows a clear run to $4 on momentum. Support is at $2.75 on a pullback.
Read why I feel Limelight is a continued takeover target for 2015 by clicking here. The company turned down a takeover offer north of $6 last year. Shares are a buy at current levels. Shares are a buy at current levels.
Trades on Hold (7): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes.
AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 2011), Rambus (RMBS, November 2011), Bebe Stores (BEBE, February 2012), Vivus (VVUS, July 2012), Zynga (ZNGA, March 2014), Galena Biopharma (GALE, February 2014)
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly