TWEAK TO OUR UPDATES SCHEDULE

As we shared last week, for the next couple of weeks we’ll be coming at you on Wednesdays instead of Thursday. Part of this reflects a trip to Singapore that I’ll be taking to keynote INVEST 2017 as well as some other travels.

We are in the belly of the earnings beast this week, and we’ve got several updates as well as a trade that will book some hefty profits. Rather than bloviate, we’ll cut the chit chat and get to it…

Trimming Back the AXTI Call Position

Week over week, the AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) call position on the Select List finished up more than 87 percent vs. the 0.55 buy in on June 14. As we will be detailing later this morning in Tematica Investing, key AXT customer Skyworks (SWKS) delivered stellar June quarter results and offered a bullish outlook that bodes well for AXT’s substrate business both near and longer-term. We suspect AXT will offer a bullish outlook when it reports its 2Q 2017 results tomorrow, but we are also prudent investors and that means knowing when to lock in some gains.

• Therefore we will sell half the AXT Inc. (AXTI) November 17, 2017calls (AXTI171117C00007500) call position at market tomorrow, keeping the other half to capture additional upside before the November expiration.
• As we do this, we will boost our stop loss to 0.75 from 0.60, which will lock in a minimum gain of 45 percent on the remaining calls.

Making Sense of GM’s 2Q 2017 Results

Yesterday, General Motors (GM) reported its 2Q 2017 results which beat on the company’s bottom line relative to consensus forecasts, but fell short on the revenue line. Helping the company’s bottom line relative to expectations was the 4% shrink in the outstanding share count as well as the idling of four facilities during the quarter, which had a positive impact on the company’s cost structure.

Here’s the thing, the company ended the quarter with 105 days of inventory on dealer lots as auto sales have continued to slow. This has prompted the explosive use of incentives to move cars, which is cutting into profits. At the same time, idled production near-term means a step down in revenue and profits, and we expect Wall Street to make the appropriate adjustments to its second half forecasts. We say that because during the first half of the year GM delivered EPS of $3.37 vs. expectations of $3.20, but the company stuck to its $6.00-$6.50 EPS target for 2017. What this means is the company expects to deliver LESS EPS in the second half of the year than it did just a few months ago.

Next week we’ll get the July auto sales data, and we doubt we will see any meaningful departure from what we’ve seen over the last few months – bloated inventories, excessive incentives and slowing car and trucks sales. Of course, we’ll let the data talk to us, but that’s what we’re expecting. Amid that environment, we continue to see GM trapped between a rock and a hard place – sacrifice profits with incentives or let inventories climb, which will only lead to further production cuts.

• We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.

Steady as She Goes with Costco Calls

Week over week our Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) calls were relatively unchanged while the Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000) on the Select List rose more than 16 percent week over week. We will remain patient with this position and look to the company’s monthly net sales reports, which should confirm the view that unlike many other brick & mortar retailers Costco is more than holding its own against Amazon (AMZN) and other e-tailing efforts. As a reminder, the key item to watch is Costco expanding warehouse footprint; when paired with the recent membership price increase, it should drive year over year improvement in high margin membership fee revenue over the coming quarters. That’s a great position to be in as we soon enter the key retailing season.

• We continue to have Buy ratings on both Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) and the Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000)calls.

Dogs Days of Summer Ahead Have Us Keeping XLU Calls in Play

We may have experienced a few mild days this week, but in less than a week, we will be entering the dog days of summer – August. With a return to more seasonal temperatures, we expect to hear the whir of air conditioning units that will drive utility production levels. In our view, that activity means we will continue to keep the Utilities SPDR ETF (XLU) September 15, 2017 $52 calls (XLU170915C00052000) calls on the Select List. Confirmation of that will be had on August 17 when we get the July iteration of the monthly Industrial Production report, the first such data point for the current quarter.

• As of last night, the position is up more than 25 percent, which puts it out of the buy zone for now. Should it dip below 1.00, subscribers that missed the initial recommendation will have a window of opportunity to get into the position.
• Because this is a relatively new position, we are holding off with a protective stop loss at this time; we will look to review that decision as the calls trade higher over the coming weeks.