JAGUAR INCOME W/E January 15 th, 2017

Transcription

1 JAGUAR INCOME W/E January 15 th, 2017 Overview: Blackrock (BLK), Allergan (AGN), Intuitive Surgical (ISRG) You asked. We delivered. At various times throughout in 2016, we collected client feedback and one of the most common request was adding a feature that would present low-risk / high probability trade set ups, generally involving selling credit spreads for passive income. Today, we are adding this feature called Jaguar Income. Selling a vertical credit spread involves either: 1) selling a bear call spread with a view that stock will not go above certain price by expiration date, or 2) selling a bull put spread with idea that price will stay above certain strike, or 3) combination of both 1 and 2 which becomes iron condor or could be done with small variation called iron butterfly. Regardless of structure used, the idea is to make low-risk, low-return, high probability bet which turns Theta burn in your favor. This kind of trading is specifically designed for those clients who do not like to take too much risk. You are not going to hit home runs with these. But you should expect more consistent return. These set ups are often used as a way of generating monthly passive income. The key is picking the right stocks. For example, you will immediately notice in fundamental discussion below that we DO NOT want any catalyst. We DO NOT want these stocks to make any material moves until expiration. We want to sell credit spreads during quiet period while we collect rent or passive income in absence of material news flow. You will also notice each trade is mirrored or aligned with technical view on the chart. Short strikes are picked carefully above resistances or below supports intentionally in order to increase the odds of them expiring worthless. While not so much with 2-leg structures, but one minor difficulty that comes with selling iron condor which is a 4-leg structure is that it could be difficult to execute at ideal price. Therefore, I have purposely placed the execution price well below the mark. When selling credit spreads, the minimum profit I am willing to accept is at least 20% for locking up margin until expiration. Otherwise, it doesn t justify the risk. Also note while all three ideas discussed in today s file are iron condors, that s only because of function of overall current market with low volatility stable range-bound price action. That will not remain the case all the time. Depending on periodic surges in VIX and implied volatilities, sometimes more aggressive switch would be necessary towards more directional credit spreads such as bull put or bear call. Lastly, Jaguar Income with at least 3 trade ideas will be sent out each Sunday. These ideas will always target expiration in no longer than 60 days (preferably days), when theca decay is accelerating. Hence, expect total number of open ideas at any given point to cap out around 15 to 18. There will be separate Performance Tracker of all Jaguar Income trade ideas. Folks, each time I add a new feature, my only goal is to help you make money. Give you good high quality set ups and help you grow your portfolio. That s it. I hope you like this new feature. Fahad Khalid

2 Blackrock (BLK) Fundamentals On Friday, January 13, the asset manager posted a decent quarter with Q4 EPS coming in at $5.14 vs. $5.04 estimate (beat) on revenues of $2.89B vs. $2.96B estimate (miss). Revenues were +2% q/q (+1% y/y) driven by strong performance fees, BRS revenue, and higher other revenue, despite lower management fees (-2%) driven by a lower fee rate. Management maintained the level of repurchases in line with prior quarters at $275M which lowered the share count, but increased the authorization by 6M and boosted the quarterly dividend by +9%. The most impressive part of the quarter was $98 million in cash inflows resulting in AUM rising $5.1 trillion. More than 90% of these inflows went into investments with longer term holding period, painting a good picture for FY2017 EPS guidance is tracking at $21.75 which equates to 17.5x forward PE with stock currently at $380 and dividend yield of 2.6%. That is cheap relative to exit PE at the end of 2015 and 2016 of above 19.3x with dividend yield of 2.35%. Bottom line is good quarter reported last week, catalyst is over. Technicals Stock failed at $400 level post December FOMC and printed a bearish engulfing candle and continues to underperform both S&P and XLF. I believe this is essentially due to low volume profit taking and rotation into money center banks which are bigger beneficiaries of rising real rates. On downside, major volume price support at $367 should remain supportive because of strong quarter reported last week. Option Trade Strategy With earnings already out of the way and no major catalysts in sight in short term, trade here is betting on stock staying rangebound. Sell February iron condor for $2.50 credit (currently $2.88). Specifically: - Sell to open 1x February 400 Calls - Buy to open 1x February 410 Calls - Sell to open 1x February 360 Puts - Buy to open 1x February 350 Puts Breakeven on Downside: $ which is about $21.85 or 5.7% cushion Breakeven on Upside: $ which is about $23.15 or 6.1% cushion Maximum profit: $2.50 divided by $7.50 margin, or 33% Stop Losses: $ and $ Days to expiration: 33

3

4 Allergan (AGN) Fundamentals On January 5, Allergan issued preliminary 2017 outlook which was largely in line with expectations, removing any questions about uncertainty going into next earnings report scheduled for February 8. Additionally, large divestment process of $40 billion sale of generic business to Teva is now over. Another hangover removed. Going forward, AGN s key franchises will be important factor for performance of stock, particularly from Botox, Linzess, and aesthetic fillers which represent 65% of current revenue base and are not exposed to Medicare reimbursement risks, thus further de-risking the growth outlook as better / cleaner picture emerges after generic sale to Teva. Moreover, Allergan currently has 65+ mid-to-late-stage programs, any number of which could be add to growth outlook but none major enough to move the needle in sentiment at least in short term. On January 5, for its 2017 outlook AGN sees revenues rising by mid-single digit percentage vs. street expectation of +4.6% YoY growth. AGN guided modest downward pressure on margins vs. street expectations of -0.2% decline, also in line. EPS growth guidance was high teens vs. street expectations of +19.4% YoY. Bottom line, with preliminary outlook already out and largely with street expectations, there should be no major surprises when it reports on February 8 before market opens. Technicals AGN long term weekly chart is looking much more constructive with bullish falling wedge pattern that will ultimately send the stock towards $300 over time. But for purposes of this trade we are only interested in short term. Resistance at $230 and support at $200. The short strikes of iron condor (dotted lines on chart) are above resistance and below support. Option Trade Strategy With preliminary 2017 outlook already out of the way, earnings on February 8 should provide no major positive or negative surprises. No major pipeline updates scheduled either. Sell February iron condor for $1.05 credit (currently $1.18). Specifically: - Sell to open 1x February 240 Calls - Buy to open 1x February 245 Calls - Sell to open 1x February 195 Puts - Buy to open 1x February 190 Puts Breakeven on Downside: $ which is about $22.27 or 10.3% cushion Breakeven on Upside: $ which is about $24.83 or 11.5% cushion Maximum profit: $1.05 divided by $3.95 margin, or 26% Stop Losses: $ and $ Days to expiration: 33

5

6 Intuitive Surgical (ISRG) Fundamentals On January 11, company pre-announced exceptionally strong Q4 earnings well ahead of expectations in all metrics. ISRG s Q4 revenue of $756.9 million was +2.5% ahead of the Street s $739.4 million estimate, implying +12% YoY growth. ISRG s Q4 procedure growth came in at +15% with estimated breakdown of US procedures growth of +13% YoY and OUS procedures growth of +24% YoY. For the full year, US GYN grew +3%, US Urology grew +7%, US General Surgery grew +33%, and other US procedures grew +16%. ISRG expects procedures to grow 9-12% in ISRG placed 163 systems in Q4 (100 in the US, 26 in Europe, 30 in Asia, and 7 in other markets). US system placements were up +20% YoY and +18% QoQ. Fantastic quarter in all metrics. More importantly this comment from BAML research caught my attention: We think an equally important part of today's release from ISRG is the announcement from ISRG that they plan on spending an incremental $80m in R&D in 2017 to accelerate development of their rich pipeline. This spending will pressure EPS in 2017, but it also increases our conviction that 2018 will be a year in which ISRG launches two major new platforms (Sp and Biopsy) and it comes at a time when ISRG's base business has clear momentum. Technicals Chart went through unwarranted correction before elections, formed a new base in low $600 s post elections, now recovering. But I believe technical recovery will be slower than expected considering hospital channel checks generally weak and uncertainty around repeal of Obamacare. Resistance at $695 and support at $645. The short strikes of iron condor (dotted lines on chart) are above resistance and below support. Option Trade Strategy With Q4 pre-announcement already out, major hangover is removed and therefore I do not expect any material positive or negative surprises on actual day of earnings on January 24. No major pipeline updates scheduled either before February expiration. Sell February iron condor for $2.40 credit (currently $3.05). Specifically: - Sell to open 1x February 725 Calls - Buy to open 1x February 735 Calls - Sell to open 1x February 630 Puts - Buy to open 1x February 620 Puts Breakeven on Downside: $ which is about $37.11 or 5.6% cushion Breakeven on Upside: $ which is about $62.69 or 9.3% cushion Maximum profit: $2.40 divided by $7.60 margin, or 31.5% Stop Losses: $ and $ Days to expiration: 33

7 Fahad Khalid Chief Investment Officer, Jaguar Analytics