Melt-Up Alert: All Systems Are Go; Buy The Blowups McDonald’s, Twitter, Match, Not Expedia – The Walt Disney Company (NYSE:DIS)

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Melt-Up Alert: Market Shrugs Off Phase 1 Trade Deal Signing Delay

The market had every reason to blow up yesterday with the news that the meeting between Trump and Xi won’t happen because Chile canceled its G20 meeting. Instead, the market closed flat. Today, we have news that China and the US agreed to a phased approach for reducing tariffs. Steady incremental progress on trade is all the market wants, recession off the table, and benign interest rate environment where interest rate movement is taken off the table all adds up to the removal of all the market bogeymen. So far 75% S&P 500 companies beat earnings, and the average is 65%. This furthers confirmation that a melt-up is afoot; you are also hearing this from other market participants. What will add fuel to the fire is further confirmation of the “ROW”, Rest of World, also returning to growth, or at least not caving any further. We have seen better news of Japan and also some firming in China (private surveys, I don’t trust the communist party stats) and better news in Germany. How do we know this? The synchronized rise in interest rates the world over. I even heard some commentators start using the meme “melt-up.” I don’t know if I was the first to talk of it, but I am pretty early on this, and it is still early.

The generals are running in the pre-market. Apple (AAPL), Microsoft (MSFT) and Alphabet (NASDAQ:GOOG) (GOOGL) are resuming their breakout, and in the case of GOOGL, we are just broke out to fresh all-time highs. Amazon (AMZN) will now catch up as well. The Nasdaq 100 ETF (QQQ) has broken to new highs. Even GE, not a leader, but a name that has been running, is running again. I may regret selling it soon. I am going to hold off and see if it breaks above its 52-week high @ $11.30, and then I’m going to get back in.

Buy the Blowups

Market participants might be cheering the prejudice against all hyper-growth companies that aren’t generating profits but that is to wide a net to cast. Companies that have a fantastic business model and good FCF but are choosing to invest in their business are ones that I want to invest in, like ROKU. This is setting up some of the best trades in front of me. At the time of this writing, ROKU the blow-up du jour has gone from 116 to 126, which is still down 10%. I believe it will make that backup and go appreciably higher. More about that in My Trading Corner below. McDonald’s (MCD) is repairing the damage from the Easterbrook resignation. Match (MTCH) got an upgrade and lifting nicely.

Twitter (TWTR) has already been punished for its stupid mistakes in its ad-server and also to my mind banning political ads. To me, banning a legal category of ads is a luxury that Twitter cannot afford. That’s a signal that it isn’t focused on growing the business. On top of that, now the shares falling 2.5% again after the DOJ charged two former employees with spying for Saudi Arabia in part by digging into user accounts on the service. I would wait a day and add to your position or initiate for a trade.

Buy MCD, MTCH, and TWTR. The same can’t be said for Expedia (EXPE)

Expedia seems to have intrinsic problems, and TripAdvisor (TRIP) also underperformed. Expedia’s stock is sliding after earnings miss estimates and full-year guidance is cut. TripAdvisor came out with quarterly earnings of $0.58 per share, missing the consensus estimate of $0.69 per share and posted revenues of $428 million for the quarter ended September 2019, missing the Zacks consensus estimate by 6.22%. This compares to year-ago revenues of $458 million. This compares to earnings of $0.72 per share a year ago. I would be wary about (BKNG) tonight. I am not sure why the travel booking sector is underperforming, but it might be its business model. Perhaps this is another “Empire Strikes Back” scenario where the airline and hotels are taking back that disintermediation.

Goldman Surveys Institutional investors

Institutional investors in October went from 3:1 bearish to 2:1 bullish, 54% bullish or slightly bullish on risky assets and said they believe that there is “still gas in the tank” and “path of least resistance is up”. You don’t need more confirmation that we are in a bull market, but let’s look at this for a moment. Sure, when people start getting bullish usually, I start talking about heading for the door. In this case, we are talking about institutional investors, and they don’t turn on a dime. I think this is as I said a confirmation that there is more power pushing the momentum forward. All systems are a GO for Melt-Up…

Let’s talk about the other “Generals” of this market: Homebuilders and Financials

Perhaps I am late to the game on the financials, but now that the 10-year is moving decisively, I think there is more gas in the tank. My preferences were for Wells Fargo (WFC) and Goldman Sachs (GS). I left JPMorgan (JPM) aside since I thought it moved the most already. Now I see JPM has decisively to breaking out, and in this kind of market, it’s time to buy breakouts if you’re a trader. I don’t know the regional banks, but they should be doing much better too. The Regional Bank ETF (KRE) could be interesting as well.

As for the homebuilder sector, I have mostly focused on the builders themselves, but it also makes sense to look at the “parts” suppliers like a Masco (DOOR), or a Fortune Brands Home & Security (FBHS), a Lowe’s (LOW), or a Mohawk Industries (MHK), and a Trex (TREX). The reason I like these is that they encompass not only just new homes but also home improvement as well. One final thing, why do I recommend LOW over Home Depot (HD)? Two things. Everyone is already in HD and LOW is getting competitive and is cheaper on a PE basis.

Fox (NASDAQ:FOX) buying local TV stations. It targeted the Nexstar stations because of its presence in NFL markets. Fox Corp. is continuing its spree of acquisitions, buying three local TV stations in Seattle and Milwaukee from Nexstar Media Group in a deal valued at $350 million. The stations, KCPQ and KZGO in Seattle and WITI in Milwaukee, were targeted by Fox because they are in “two key markets that align with the company’s sports rights,” Fox said in announcing the pact. The Seattle Seahawks and the Green Bay Packers both play in the National Football Conference, where Fox has extensive NFL rights. If you recall, I advised that traders that want to express their bullishness regarding TV advertising in this looming political season to buy Sinclair Broadcast Group, Inc. (SBGI). Now I learned that Fox is not sitting on its laurels and is boosting its broadcasting coverage in the local market to better take advantage of the NFL footprint and perhaps Barron’s has got a good idea as well. SBGI has a much better dividend if you are thinking about this opportunity as a long-term investment.

Earnings of non-blowups that are interesting

Square (SQ) is up nearly 2% in after-hours after earnings. It reported an EPS of $0.25 vs. the estimated $0.20 and reported revenue of $602 mln vs. the estimated $596.85 mln. I am a fan of SQ. I think SQ has spent enough time in the penalty box. I think the chart is showing a change to the bullish side for SQ. Let’s start with the three-month chart:

At first blush, the inverted “head and shoulders” is always bullish, but for SQ overall, it has made a lot of attempts to break above this mid-60s level and failed before. However, the sharp pop today gives me confidence that in a “melt-up” environment that SQ will perform. Here is the six-month chart and where I can make my case for optimism.

Here we see a few peaks that reach 66 over the last five months. If SQ punches through this level and holds it, the two arrows on the left give cause to be optimistic for more alpha. In charting there is a general rule that stock prices tend to fill the gaps. The right-most arrow is the latest gap down. SQ should go on to fill that gap-down and take SQ into the 70s and then into the 80s. If Square gets momentum, then PayPal (PYPL) should bull up as well. I would consider SQ and PYPL for a buy.

Analyst Corner

Masonite International (DOOR): Stifel Nicolaus upgrade from Hold to Buy, yet Royal Bank of Canada downgrades DOOR Outperform to Sector Perform.

Lowe’s Corporation: Credit Suisse Group AG from Neutral to Outperform.

My take: I think DOOR makes sense if you believe that housing should continue to do well.

Apple: Goldman Sachs raises the PT to $192, a 25% upside.

Datadog (DDOG): Credit Suisse Group AG initiates with a Neutral and a $40 PT, 14.6% upside.

Ping Identity (PING): Credit Suisse Group AG initiates with an Outperform and a PT of $21, an upside of 27%.

Trading Corner

I had ROKU on a tight call spread with only $300 value at risk. ROKU fell hard, more than I expected, down 20 points in the pre-market. I intend to roll down the short call and turn my vertical spread into a calendar spread. I will then add to my long side at a lower strike price and effectively create a one by two spread. My expiration is out to January and I am pretty confident that ROKU will rise above even my original strike price. Why confidence? I believe that Roku-powered TVs and Roku sticks will be one of the biggest sellers for Christmas. Also, ROKU beat on earnings (lower losses), beat on revenue, beat on subscriber growth and beat on ARPU. Market participants knew the value proposition going into the earnings, so why the sell-off? The algos/robots have now been tuned to short any stock that reports losses, no matter how strong the business model. I think the “Buy the Bomb” theme is a winner. Cramer just got on and said ROKU disappointed. Am I allowed to disagree with him? Respectfully I do. ROKU is the single best pure-play on the turn to streaming. ROKU brings strong ad serving to OTT. Roku Channel is generating good ad revenue, which is the key to the biz model. There are a bazillion streamers besides Netflix (NFLX), Disney+ (NYSE:DIS), Hulu, HBO, but even among the big boys at this point, where is the best place to market your service or show? That’s right, ROKU.

Disney is set to underperform in profits

If the algos are tuned to punish all companies that have falling earnings, then Disney might very well be punished today. If you own DIS in a long-term account, consider writing calls. Talk to your financial advisor and see if she agrees. Disney’s consensus EPS estimate is $0.97 (-34.5% Y/Y) and revenue estimate is $19.02B (+32.9% Y/Y). It will be an interesting experiment to see if DIS is punished by the robots on falling earnings, even with the explanation that this is due to investing in the future. I may actually long a well out-of-the-money PUT on DIS. I am not critical of DIS or its desire to invest in the future. I fully endorse the streaming strategy. I am only concerned about the stupid robots that are run by rocket scientists that set up back-test macro-trading patterns. Pattern 1 right now is to short sell lower profit results, and DIS could be sold tomorrow.

I checked the premium on the Put options for AAPL, I took two contracts for under $400. I think that if you are long AAPL, you should take a very small position in a low-cost Put for AAPL. If you have 300-400 shares, buying two contracts with a 129 strike price for under $200 each is a small price to pay to insure your principal. You could look into writing calls as I suggested in the previous paragraph to generate funds to pay for the “insurance”.

Disclosure: I am/we are short DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not bearish long-term on Disney. I just think that there is a danger that it could get sold on the lower earnings by program trading. I continue to be long ROKU and have added Long Call contracts.

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