Booking some gains, boosting stop losses levels and new call recommendation as well

Given the holiday weekend that for many is the last summer hurrah for many folks, we’re coming at you a day earlier than usual lest we fall victim to even lower trading volumes during this historically quiet trading week. Over at Tematica Investing, I’ve been doing some pruning and repositioning on the Select List, and in today’s issue, we’re doing more of that by exiting Habit Restaurant (HABT) shares, with a tasty gain, and adding Alibaba (BABA) shares to the fold as a Digital Lifestyle company.

In that issue, I walk you through my rationale, which includes not only the continued adoption of the Digital Lifestyle in China but Alibaba’s other business – cloud, media and innovation projects – are on the cusp of being drags on the overall profit picture to profit generators. To me, this looks like the same situation Amazon was in several years ago – an -commerce platform that was driving the ship with some questions as to whether or not it could be profitable.

Today, EPS expectations for Amazon in 2019 are $25.37 up from -$0.52 in 2014 due in part to smart investments in recent years as well as the continued growth in Amazon Web Services. While many compare Alibaba and Amazon, this is one area in which Alibaba differs from Amazon as the company is already profitable even though its cloud business is a drag on profits.

As I write in this week’s Tematica Investing:

In coming months, odds are we will see continued growth in China digital commerce as China consumers build up for the year-end holidays and Chinese New Year. That along with other gains in its cloud and digital media businesses should see Alibaba closing the profit gap leading to not only more comparisons to Amazon, but to multiple expansion to a PEG ratio of 1.1x that offers upside to $230, if not more.

Chinese New Year is the biggest gift giving holiday in China and in 2019 it begins on Feb. 5 and lasts for 7 days. That timetable as well as the current share price have me adding the Alibaba Feb. 2019 180.00 calls (BABA190215C00180000)that closed last night at 15.26 to the Select List. I’m setting a wider than usual stop loss at 10.00 given the extended time table, and our strategy will be to either scale deeper into the position or add a layered one should the opportunity present itself.

Taking some chips off the table for our Costco calls

To fund this new position, we’re going to trim back our position in the Costco Wholesale (COST) January 2019 230.00 (COST190118C00230000)calls that closed last night at 10.89, 65% higher than our buy price on Aug. 1. I’m selling half the position on the Select List, a prudent move in my opinion, and keeping the balance in place to capture the additional upside. As you make this trade, you should also boost your stop loss to 10.00 from 8.50, which should ensure a minimum return of just over 50% on this remaining slug of Costco calls.


Boosting our Netflix stop loss levels

With the recent surge in Netflix (NFLX) shares, our layered call option approach for the shares has also paid off rather nicely of late. As of last night’s close, our Netflix (NFLX) Jan 2019 400.00 (NFLX190118C00400000)closed at 23.00 while our Netflix (NFLX) Jan 2019 350 calls (NFLX190118C00350000)finished trading at 45.50 and both are up 45%-47% from our initial buy-in prices.

While I continue to see more upside ahead for the underlying Netflix shares, given my $500 price target, we want to do the smart thing with the calls full well knowing how volatile call options can be. Therefore, we are:

As Netflix shares churn higher, I’ll look to revisit those stop loss levels.


Housekeeping: Stopped out of our IFF calls

In yesterday’s trading, our International Flavors & Fragrances (IFF) Nov 2018 135 calls (IFF181116C00135000)calls hit a low of 2.40, which tripped our 2.50 stop loss. Given our 3.02 buy price, the position generated a return of just over 17%.



About the Author

Chris Versace, Chief Investment Officer
I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."

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