Key points from this issue:


Adding some downside protection 

In yesterday’s weekly issue of Tematica Investing, I shared a number of data points and surveys that raise several flags that could wind up being headwinds as get ready to enter the September quarter earnings season. Despite the usually behind the curve Federal Reserve bumping up its 2018 GDP forecast to 3.1% from the prior 2.8% yesterday following its September FOMC policy meeting, the situation I am seeing in the hard economic data points to growing inflation in the systems and rising trade concerns as the next phase of President Trump’s tariffs and China’s response take hold. From a company’s perspective, this points to rising input costs and a tinge of uncertainty that could lead to conservative guidance relative to expectations.

As we saw, EPS expectations for the back half of 2018 have already started to inch lower. Moreover, recent EPS beats from the likes of Jabil (JBL), KBHome (KBH), Nike (NKE) and others, have led to the respective shares selling off. We’d expect to see that when we get a disappointing report like the one this week from Bed, Bath & Beyond (BBBY), but when EPS beats are following by a pullback one way or another it tells us stocks are close to being priced to perfection. Not surprising given the strong run-up in the stock market this year, last year and in 2016 that has the S&P 500 up 42% since the end of 2015.

In my view, this means we should add some downside protection to our two active call option positions that are Altria (MO) January 2019 65.00 (MO190118C00065000) calls and the Universal Display (OLED) January 2019 130.00 (OLED190118C00130000) calls. In examining the timetable for September quarter earnings, I’m opting to use November dated calls for the calls for the inverse ETF of the S&P 500 that is the ProShares Short S&P 500 (SH) shares. We’ll stick with out of the money calls and that means a strike price at 28.00.

Putting it together means adding the on ProShares Short S&P500 (SH) November 2018 28.00 (SH181116C00028000) calls that closed last night at 0.22 to our holdings. As we add this protective position, we’ll also want to limit potential downside and in this case, it means setting a protective stop loss at 0.14.

  • We are issuing a Buy on ProShares Short S&P500 (SH) November 2018 28.00 (SH181116C00028000) calls that closed last night at 0.22. With this addition, we will set a protective stop loss at 0.14


Checking in on our Altria and Universal Display calls

As I stated above, I continue to have a Buy rating on both the Altria (MO) January 2019 65.00 (MO190118C00065000) and the Universal Display (OLED) January 2019 130.00 calls (OLED190118C00130000)calls. We’re coming up on the $0.80 per share dividend payment from Altria, it’s first at that level and if history holds that should be a positive catalyst for the underlying MO shares.

For our Universal Display calls, survey data points to solid uptake rates for Apple’s new iPhone XS and XSMax as well as the iPhone X, with the larger format XSMax being the best of the bunch. This means that half of Apple’s iPhone portfolio will have organic light emitting diode displays, up from just one model until very recently.

In just under two weeks, on Oct. 9, Alphabet/Google (GOOGL) will unveil its latest Pixel 3 smartphone, which is also expected to have that technology. In addition to smartphone models, the ZTE Axon 9 Pro, and Sony Xperia XZ23 will soon hit the market joining recent ones from Huawei, Samsung, Asus and Xiaomi — and they all will have some form of OLED display.

We are also seeing more introductions of the technology into the TV market, with products from LG, Sony, Toshiba and Philips either having already launched in some markets or poised to be launched in the coming months.

The bottom line is we are starting to see the uptake in OLED technology that was talked about earlier this year and that’s very positive for our Universal Display position, and sets the company up for what is likely to be a very positive September-quarter earnings report and favorable December quarter guidance.

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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