It’s been a whirlwind in DC over the past week, navigating the new administration’s hastily issued executive orders. The chaos is part of Miller’s strategy to flood the news cycle and markets with confusion. What’s interesting is the market’s complacency in response to the White House’s tariff news on Canada and Mexico, as well as Trump’s Gaza comment—suggesting it’s merely the “boy who cried wolf” for the fourth time. I expect more bluster headlines and a muted market reaction.

Amid this politically charged week, I’ve kept my eyes on Ralph Lauren.

$RL: Ralph Lauren’s holiday results well above expectations

I had written about my experience visiting a Polo store in New York over the holidays, where the store had low inventory on certain items featuring Americana insignia. Going over the 3Q results, I was not surprised that it did as well as it did. Music to my ears:

• Third Quarter Revenue Increased 11%, Ahead of Expectations, with Better Than Expected Holiday Performance in All Geographies Driving Outperformance

• Global Direct-to-Consumer Comparable Store Sales Grew 12%, Driven by Positive Retail Comps Across Regions and Channels; Global Wholesale Sales Increased High-Single Digits Including a Return to Growth in North America Wholesale

• Adjusted Gross and Operating Margin Expansion Exceeded Our Outlook, with Strong Full-Price Demand and Expense Discipline More than Offsetting Investments in Marketing and Key Cities

• Maintained Healthy Balance Sheet with Accelerated Free Cash Flows and Well-Positioned Inventories at Quarter-End

• Returned Approximately $500 Million to Shareholders Through Our Dividend and Repurchase of Class A Common Stock This Fiscal Year-to-Date

• Raised Full Year Fiscal 2025 Revenue and Adjusted Operating Margin Expansion Outlook Based on Strong Year-to-Date Performance

The results were not unexpected given its presence in the affordable luxury space, but this DTC segment’s 12% YoY growth should garner some attention. Here’s why I believe it’s critical: Polo products have always been a brick-and-mortar brand; thus, making this seamless transformation indicates that its digital campaigns are effectively reinforcing brand power online.

Sell-side adjustments post-Q3 ER

As of February 11, it is trading at $272. The sell-side liked what they saw last holiday season and collectively raised the price target, with a mean of $288.29. In conjunction with sell-side visions, the chart below reflects optimism in its intermediate trend:

It would be a blessing of an opportunity if it can fill the Q3 earnings gap (orange box) for entry in my view.

February is historically the worst-performing month of the year for consumer discretionary, and it’s quite plausible that it reaches that level or drops further to test the 50-day SMA. Ralph Lauren is known for filling gaps and testing key moving averages.

Here’s another look at the chart from a weekly timeframe. When the WMA-10 (purple line) is above the WMA-30 (orange line), it tends to sustain momentum in the intermediate term. If you recall my prior tips on weekly charts, the WMA-10 acts as a magnet, so the stock will typically meet it at some point every few weeks. In this case, my educated guess is that this happens when it fills the Q3 gap.

Capital CIQ Spread on Ralph Lauren

Confirming my prior thesis on holding out to test either the daily MA-50 or the weekly MA-10 before going long, the Capital CIQ Spread supports this view, suggesting that waiting is likely prudent. Here, Ralph Lauren has already reached the CIQ median target of $279.15 and is currently at $272.

A good entry point, based on RL’s historical CIQ spread, is somewhere below 15% from the current CIQ median of $279.15, which puts it at $237. Similarly, this aligns with the SMA-50 at $239.

I’d wait for now but will likely size up for the next trade and set an immediate 8% stop loss upon entry.

I’ll keep you posted and thanks for reading.

-G

As with any new administration entering office, volatility accompanies every new term. But this week was more eventful than most. A myriad of Trump’s executive orders brought havoc to Washington, including directives to explore a “digital asset stockpile,” order the creation of a cryptocurrency working group tasked with proposing new digital asset regulations, and investigate the establishment of a national cryptocurrency stockpile. To some degree, he’s “keeping” his campaign promises.

Paulsen’s “Walmart Recession Signal”

Before diving into my favorite “recession index,” I want to point out that reading about macroeconomics is one of my favorite pastimes. That said, I take what I read from other economists with a grain of salt. They don’t usually know either—but they sure do sound smart in their writing.

“If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” - Peter Lynch

I’m firmly in the Lynch camp, believing that trying to predict recessions, interest rate movements, or other large-scale trends rarely leads to investment or trading success. Lynch emphasized that some of the best opportunities arise when the market is gripped by macroeconomic fears or during recessions, when good companies are undervalued. If you want to dive deeper into Lynch’s views on focusing on what you can control, One Up on Wall Street is a must-read—even 30+ years later, as human nature remains unchanged.

That said, one of the more unusual market signals right now is what Jim Paulsen refers to as the “Walmart Recession Signal.” The concept is simple: it’s Walmart’s stock price divided by a luxury index. And at the moment, it’s flashing a clear warning: “recession!”

The chart above highlights that periods of Walmart significantly outperforming luxury-focused companies often coincide with rising corporate bond spreads. A widening spread reflects increased risk aversion, a hallmark of economic stress or looming recessions. If Walmart’s stock is surging while junk bonds are sinking, the recessionary concerns voiced by some economists are not without merit.

Conversely, this divergence might also suggest that Walmart’s new business strategy is paying off. Meanwhile, other recession-friendly retailers like Dollar Tree (DLTR) and Dollar General (DG) are struggling.

Frankly, the recent employment data has muddied the Fed’s rate cut outlook, but I plan to trade short-term momentum in either direction while keeping an eye on the VIX.

Earnings I’m closely watching: DKNG & RL

DraftKings (DKNG)

While it may be a legislative trade in the long term, the weekly chart shows momentum building around DraftKings, particularly following Netflix’s stellar Q4 earnings. Netflix added 18.9 million paid subscribers—the most in its history—pushing it past the 300 million mark. Notably, this growth was partially driven by a one-off live event, the Paul-Tyson fight.

Even if the NFL delivered customer-friendly results, DraftKings profits from losing bets. With Tyson “losing,” I’m inclined to believe the company delivered positive results, in line with Netflix’s Q4 performance. It’s been a bumpy ride, but I remain bullish going into its earnings on February 13th.

Technically, it tested the inverse head-and-shoulders neckline at $42 this week — and was rejected. This typically indicates that the market is aware of this level. Therefore, upon an upside breakout, I believe it will act as a springboard when the time comes.

Ralph Lauren (RL)

I don’t usually discuss trades I missed, but the tickers often earn a spot on my watchlist.

This is because I can either enter the trade on momentum (“buy high, sell higher”) now or wait for a consolidation phase while it oscillates between two levels.

During one such consolidation in December after the election, I came across a picture of Kai Trump standing with Don himself, wearing Ralph Lauren’s American flag sweater.

A few days before the holidays in December, I visited one of the Ralph Lauren outlet stores in Woodbury, New York. The scene was both fascinating and baffling. The store was packed with tourists from NYC, eagerly grabbing specific items, particularly Polo Bear products and Americana-inspired sweaters.

While the “old money” look has been trending since the show Succession, I’d argue that Trump’s presidency has coincidentally boosted the “old money” Americana trend—driven more by political insignias than the preppiness that defined the brand in the 80s. The Bear Polo trend will eventually fade—only to return cyclically—but for now, I don’t see it losing momentum.

In my view, this is a premier brand that appeals to a distinct clientele, setting itself apart from the likes of Gucci and Louis Vuitton.

Q3 Earnings on February 6

I’m expecting a solid beat that covers a strong holiday season. I will dive more deeply into the fundamentals at a later point but please see the Capital IQ estimates going in:

The expectations for earnings are high at around $4.51 per share; however, the focus will be on its FY guidance, which I anticipate will either be raised or at least adjusted.

I’m slightly hesitant to go long before earnings, primarily because it’s trading above the CIQ mean. Nonetheless, its PEG ratio remains on the healthier side at 1.89x.

All in all…

Both DKNG and RL offer decent trading opportunities, in my opinion. DKNG might be a solid earnings play, while RL appears to be a longer-term hold. Fortunately, RL’s options liquidity has improved significantly over the past year, making LEAPS an attractive consideration as well.

Thanks for reading!

- G

Short-term trading opportunity for Q1 ‘25

If you’ve been following me, I may have alluded to cracking McDonald’s options as both a mysterious and rewarding endeavor. The options chain benefits significantly from being heavily owned by institutions, where large block orders often exert Vega upon execution, frequently causing massive premium hikes. For example, McDonald’s is currently trading at $283; it does not need to “squeeze” to make this a profitable trade. It simply requires a 5% move within a reasonable timeframe.

I believe another trade is brewing as it is consolidating near its key areas.

MCD daily chart with key MAs

As with other consumer discretionary stocks, such as Domino’s Pizza (DPZ), McDonald’s tends to fill nearly “every” gap and test its key moving averages. In this case, the daily SMA-200 happened to overlap with the gap left on August 19th, which was filled on January 14th. Since then, it has been in consolidation. The E. coli outbreak news dampened momentum on November 13th, and McDonald’s has been attempting to break out of that area ever since. However, I am placing significant weight on the fact that it bounced off the SMA-200 on January 17th.

OTM Calls for 2/21 and beyond

When trading options, the anticipation of unknown future events causes implied volatility (IV) to rise, the main variable that prices the contracts. The days leading up to earnings for McDonald’s tend to see IV increase exponentially as we approach the premarket release, which, in this case, is on February 10th. Here, the $285 calls for February 21st are showing some volume covering the earnings. Notably, large blocks of orders came through around 11 a.m. today (1/23), giving the buyer a two-week window to purchase the contracts at a nullified premium, i.e., cheap now.

MCD weekly chart

Even as a short-term trader, I’d argue that focusing on the weekly timeframe is likely more critical than the daily timeframe, particularly for a DJIA component. This is because institutional holders tend to rely heavily on longer timeframes for their analysis when deciding whether to hold a position, and fundamental theses take time to materialize.

My “Secret” Sauce: Bollinger Band on weekly

The Bollinger Band (BB) is one of my go-to indicators for entries and exits. More often than not, entering at the bottom of the BB has generally resulted in trades where the reward outweighs the risk.

McDonald’s is currently hovering and consolidating at the bottom of the weekly Bollinger Band chart, which is my signal to enter.

If you examine the chart above, you’ll notice that MCD tends to oscillate between the lower and upper bands before breaking out. Furthermore, it generally takes at least 8–12 weekly sessions to move between these two ranges. This insight can guide how to construct the options strategy.

In this case, I prefer to give at least 90-days to expiration, i.e., 12-weeks, though the February bull trader has opted for February contracts. I’d also point out that the downside risk is quite tempered for the time being.

Capital IQ CIQ on McDonald’s

Throughout the years, I’ve used Capital IQ CIQ data to configure my strikes along with my expected timeframe. See below:

McDonald’s is hovering near the bottom range of the CIQ at around $280, while the CIQ median target suggests a price of $322.

I personally do not believe it will reach $322 but find it plausible for the price to approach the average of these two points, around $301, within the next 12 weeks.

Another important consideration when choosing an options strike is to allow some wiggle room in case the target is not reached. You can do this by either buying an at-the-money strike or selecting a strike a few points below your target. For example, in this case, $300 is a significant psychological barrier, so I’d prefer the $295 strike.

For whatever reason, the biggest risk from a market structure standpoint is breaking below the daily low of $276.53 from January 16. For me, this is where I would place my stop.

Fundamental and Market Hopium

There’s a lot to cover on the fundamental side of the business, along with the political factors that could impact price action in the short term. I’ll dive deeper into this in the coming days. Stay tuned.

Thanks for reading.

First, happy new year and wish you all the best in 2025 in the market and in your personal endeavors. I have not been able to update more frequently the last few weeks due to the end of the year work required in transitioning from my current role to another at the beginning of the year. Thank you for your patience.

This year in the market is likely to be driven by “Wag the Dog” headlines, potential adverse data challenging the Fed’s efforts to achieve its dual mandate, deregulation, and massive inflationary spending bills poised for passage — shaping up to be a wonderful year for volatility traders.

“Ah shit, here we go again.”

Speculating on the Spooz’s exact year-end target is, in my experience, a fool’s errand. However, we can still gauge—at least circumstantially—how volatile this year might be under the new administration. From my perspective as a legislative counsel in Washington, the first few months post-inauguration often prove euphoric, with promises of new spending bills passing and the uncertainty of the election season coming to an end, potentially resulting in a “relief rally” for a few weeks. That said, I agree with ex-Fed counsel, Joseph Wang that, at least for now, legislative policies seem secondary to the Federal Reserve’s actions and options flows.

Even without the “Santa Rally,” the U.S. indices have demonstrated a broad-based rally, with all S&P 500 sectors recording weekly gains. However, this optimism is somewhat tempered by caution among asset managers. With equity valuations soaring in growth tech, firms like Vanguard have advocated for a defensive portfolio stance, increasing allocations to fixed-income assets. For example, Berkshire Hathaway has adopted a similar approach this year, raising capital by significantly reducing its positions in Apple and Bank of America. This possibly reflects concerns over potential market corrections — and the limited capacity for further interest rate reductions by the Fed.

Spending spree with a George Soros acolyte

"Look, the United States is not going to default on its debt if I'm confirmed. But I will tell you that, for people who don't understand the debt limit, it might be like taking out your handbrake in your car, that you can still hit the brakes, but it's one less feature."

— Scott Bessent, U.S. President-elect Donald Trump's nominee to be Secretary of Treasury

Complicating the Fed’s monetary policy outlook are additional fiscal and trade pressures. Trump’s proposed tax cuts and increased tariffs, combined with Scott Bessent’s statement during his confirmation hearing about collaborating with Congress to eliminate the U.S. debt limit, could further exacerbate challenges to the Fed’s rate reduction cycle.

The IMF has also issued warnings about potential inflationary pressures arising from Trump’s economic policies. These measures could stimulate demand while constraining supply, leading to increased inflation. Such a scenario might compel the Fed to reassess its interest rate policies, potentially delaying planned rate cuts. While this remains an oversimplified speculation on the new administration’s policies, what we do know is that it’s likely to be a promising year for volatility traders!

Shitcoin Mania

Case in point, here’s the U.S. President-elect shilling his own memecoin, $TRUMP, on January 17, 2025, just days before the inauguration — a moment destined for the history books of grift.

By mid-morning on January 18, the market capitalization had exceeded $30 billion — and $70 billion by January 19th morning. The coin’s official site stated that 200 million meme coins had been issued, with an additional 800 million to be added over the next three years. For example, one individual bought $1 million into $TRUMP and turned it into $120 million within a few hours. Not to mention 80% of the float is owned by one unknown wallet. A grifter’s paradise, indeed.

This is just a small glimpse of what’s to come in the regulatory landscape. Many agencies that traditionally protect investors and consumers, such as the SEC, FTC, and CFPB, are likely to be weakened under this new executive branch — creating the perfect conditions for a repeat of the Dutch Tulip Mania. Many will lose fortunes chasing quick returns.

Trump’s crypto mirage

During his 2024 campaign, he pledged to establish the United States as the “crypto capital of the planet” and proposed creating a strategic Bitcoin reserve — mere bluster, in my view, and a topic for another day. Trump also nominated crypto-friendly individuals to key positions, such as former SEC Commissioner Paul Atkins as the new SEC Chair, replacing Gary Gensler, who is stepping down. Additionally, venture capitalist David Sacks has been appointed as the White House AI and Crypto Czar, tasked with developing a legal framework for the cryptocurrency industry. Notably, the industry donated at least $10 million to Trump’s inauguration fund in a bid to “kiss the ring.”

A lax crypto regulatory environment could lead to significantly heightened volatility as institutional traders shift from low-turnover assets to speculative positions fueled by hearsay. Once again, this is great news for VIX traders.

The Fed is stuck for 2025

In the backdrop of these pending regulatory changes, the Fed finds itself navigating a complex and precarious landscape, especially when Chairman Powell has to deal with very public discourse with Trump. Tasked with its dual mandate—maintaining price stability and promoting maximum sustainable employment—it must also contend with the day-to-day bluster excreting from the White House, which shapes public sentiment and market reactions.

Notably, the administration’s “Project 2025” includes proposals to merge key regulatory bodies and potentially “abolish” the Fed, advocating for a return to a commodity-backed dollar. While such drastic measures would require legislative approval, the administration’s stance indicates a potential shift toward a reevaluation of the Fed’s role.

Additionally, the administration has expressed a desire to directly influence monetary policy. Trump has suggested that the President should have a say in Federal Reserve interest rate decisions, raising concerns about the central bank’s independence. Although Chairman Powell publicly rejected this idea, such a perspective could create tensions between the executive branch and the Fed, particularly if policy directives conflict with the Fed’s assessments of economic conditions — an almost inevitable outcome.

The administration has embraced expansionary fiscal measures, including significant tax cuts, increased infrastructure spending, and substantial tariffs aimed at bolstering domestic industries. The tax cuts, for instance, have led to a ballooning federal deficit, which the Congressional Budget Office projects to reach unprecedented levels in the coming years. This fiscal expansion exerts upward pressure on inflation, complicating the Fed’s efforts to stabilize prices. At the same time, tariffs and trade restrictions, another hallmark of Trump’s policies, disrupt supply chains and raise production costs, further fueling inflationary pressures. Thus, if macroeconomic data points to inflationary pressures creeping back up, the Fed will be stuck, forced to put the brakes on lowering rates. In fact, it might even compel the Fed to double down on its quantitative tightening efforts.

As a side note, this is a fantastic book that illustrates the Fed’s role behind the scenes as a clandestine volatility seller through its trading desk operations and indirectly stabilizing the broad markets.

All in All…

This year is likely to be driven by headline bluster that impacts both volatility and the Fed’s policy directives. While the old value mantra of buy-and-hold could still work, it might require a “coffee can” approach to investing—essentially, setting it aside and forgetting about it. Despite the despondent outlook I’ve outlined for the regulatory space, this environment also presents an opportunity to closely monitor headlines and anticipate broad market movements in the short term. One of the first steps an options trader should take is to focus on both the VIX and VVIX before individual names, in conjunction with tracking 10-year yields.

Best of luck to you all — and godspeed.

I’ll start by saying that my timeframe for trading options is typically less than 60 DTEs, roughly covering eight weeks. Each position represents less than 2% of my total trading portfolio. Aside from news-driven corporate events, keep in mind that the shorter the timeframe, the less likely fundamentals matter. As Graham said, in the short term, it’s “a voting machine.”

My current DKNG position is negligible, but there might be something brewing under the hood, particularly when looking at the weekly chart. Before diving into the technicals, I’ll cover the corporate fundamentals that could impact the business in the short term. I can’t imagine putting on a trade without giving some weight to them.

Q4's NFL "Customer Friendly" Outcomes

Q3 earnings provide insightful clues, stemming from “customer-friendly” outcomes in the NFL early in the fourth quarter. These outcomes appear to have caught the company by surprise, as they described it as “the most customer-friendly stretch of NFL sport outcomes [they] have ever seen.” This unexpected turn resulted in headwinds of $250 million and $175 million to fiscal year 2024 revenue and Adjusted EBITDA guidance, respectively. Oof!

CEO Robins made a point during the call regarding the Ravens’ 35-34 win over the Bengals on Thursday Night Football as an example of how a single game can impact its top and bottom lines :

“Just last night, if the Bengals made that two-point conversion or if they didn’t score that last touchdown, there would have been very different outcomes...So, things can swing either way. Over a longer period of time, it normalizes.”

This is no different from a casino business operating as the “house” in a sportsbook. In the long run, outcomes will generally swing back in the house’s favor. As a result, these impacts are negligible over the next quarter or two and will ultimately revert to the mean with time.

For now, this is a legislative trade

For those not paying attention to state legislative news, this trade can be supremely frustrating, especially if you’ve been holding the position for some time. It’s a false Peter Lynch trade driven by recency bias. For example, when you see “all” of your peers making bets on DraftKings, encounter promotional materials during games, and scroll through social media posts about parlay wins, it can feel like everyone is betting on sportsbooks.

However, DraftKings is still navigating regulatory growing pains. Strong momentum is often disrupted by unexpected news, such as state tax hikes or new proposals that could undercut the company’s profitability. It’s incredibly frustrating, and the chart reflects this.

As of November 19, DraftKings operates in 25 states. It’s important to remember that gambling laws are contentious, and history suggests that adoption may remain uneven and slow due to political and cultural differences among states. For example, it’s easy to see why Nevada’s legislature has not passed online sports betting. Some states may prefer to focus solely on expanding casinos, viewing online sports betting as a potential impediment to those efforts, while others may have underlying "religious" objections.

DraftKings’ revenue model is straightforward. Like any casino house, it sets odds that slightly favor the house, ensuring it profits in the long run by retaining players’ losing bets.

More importantly, this trade hinges on the increasing legalization of sports betting across the U.S., making it inherently choppy and sensitive to knee-jerk reactions from Bloomberg headlines. More players mean more bets, ultimately driving higher adjusted EBITDA.

Now, consider the recent Paul vs. Tyson fight, which drew 60 million households. This event was highly favorable for sportsbooks because they collect a commission, or “vig,” from each bet. Additionally, public bettors heavily backed Tyson over Paul. As I mentioned, DraftKings profits from losing bets, and with Tyson “losing,” this further strengthened their position. I view this as a strong reason to go long ahead of the next earnings report in mid-February 2025.

Always look to the weekly chart first

Despite my concerns about regulatory hurdles over the next six months, there’s a lot to like about the current technical setup on the weekly chart, which, in my opinion, could attract momentum traders and help overcome these barriers for a decent trade:

1. Long-term setup: The chart has formed a Cup with Handle pattern on the weekly timeframe, inching toward the handle high of $50.

2. Intermediate-term breakout: There’s a clear breakout from an inverse Head & Shoulders (IHS) pattern.

3. Institutional crossover: The 10-week and 30-week moving average (WMA) crossover—an institutional favorite—has triggered.

As of today, Goldman reiterated a Buy rating with a raise price target from $54 to $57. The CIQ average price target is $50.73 with a high forecast of $77.00 and a low forecast of $33.00.

Here’s a little secret when using Capital IQ (CIQ) Price Targets: if you chart the CIQ high and low range over the past few years, you can identify the general price range it traverses. Some traders capitalize on moves from the mean to the high, or vice versa. In this case, it tends to sell off near the CIQ Mean, so you’ll know when I plan to trim.

As for options, I currently hold multiple contracts between $45 and $50. My focus is on buying time and near at-the-money (ATM) strikes to cover the next earnings in February, accounting for the implied volatility (IV) buildup and the Tyson-Paul bets. For example, the 3/21/25 $45C contracts show decent open interest (OI) and volume with a reasonable spread. If this is purely a technical play, expiration dates matter less—but I’d avoid February contracts since they can quickly lose premium post-earnings.

All in all, this is one of my favorite setups at the moment.

Buy Me a Book

Disclaimer: This is not financial advice, and it would be ridiculous to interpret it as such.

This article was originally published on August 21, 2024 before Peloton’s Q4 earnings report on X via GeorgeC1953

The end of August, just before Labor Day, is typically slow for most legal practices. I no longer handle complex corporate cases in court; now, I focus on legislative policies related to income tax and accounting methods. It’s less dramatic, but it allows me to tackle complex policy issues, akin to playing brain puzzles everyday. I can't complain – now back to the topic.

*This is just my analysis based on publicly available disclosures. This is neither legal nor financial advice.*

Peloton will report Q4 earnings tomorrow pre-market. As I've alluded in my previous article, I've been digging through large institutional buys from last quarter, as disclosed in 13Fs. One notable buy was GTCR and I don't believe it's inconsequential.

It opened a new position with 14M shares last quarter, representing 3.775% of common stock outstanding, now Peloton's 6th largest holder, market value representing about $45M.

GTCR LLC: a big boy from Chi-town

GTCR LLC is a PE and VC firm specializing in mezzanine, middle market, PIPES financing, complex corporate carve-outs, growth capital, buyouts, investments through transformational acquisitions, organic growth and add-on acquisitions.

(On a side note, the team's directory page is uninspiring, took a page out of Suits, and sprinkled with Patrick Batemans.)

GTCR typically identifies and pursues platform acquisitions with management partners through funding a new company to make the initial acquisition and backs incumbent management of an existing company to acquire the business in high growth fragmented industries.

Within healthcare and life sciences, it invests in the product segment with a focus on branded devices and in software, services, data and information services, technology-based outsourcing and network-based services. Here, Peloton categorically fits their typical investment target, except that it’s a public holding.

It typically invests in U.S. companies, with transaction sizes ranging from $30 million to $500 million in companies with operating profits between $5 million and $150 million. Like any private equity firm, it generally seeks to take a majority stake and also provides debt capital for struggling companies. However, since JPMorgan and Goldman provided the revolving credit facility, I do not believe this firm would take on that role in this case.

So why invest in a company that merely makes "stationary bike with an iPad?"

Simple, in my opinion, it's undervalued. I believe David Einhorn's Greenlight capital, a value-oriented HF, opened a new position of 6.7M share last quarter for the same reason.

It’s an oversimplification to value a company with many moving parts, but I prefer to use the TEV/NTM Total Revenue ratio to gain "high-level" value insights into how much investors are willing to pay for each dollar of future revenue. In other words, a higher ratio suggests that the market has higher expectations for future growth or profitability, while a lower ratio could indicate that the company is undervalued or expected to have lower growth prospects.

As mentioned in the Q3 earnings call, management is not focusing on growth but on cost reduction. By this metric, the company is trading at a much lower 1.04x compared to its COVID-19 heyday of 8x. Bang-for-the-buck!

GTCR probably wants more shares

It’s rather cringeworthy that they trademarked "The Leaders Strategy™" to describe their modus operandi, with the following statement standing out:

Peloton currently has co-interim CEOs running the company following the resignations of Foley and McCarthy. The Board has been actively searching for a new permanent CEO over the past few months, and my hunch is that this is where GTCR wants to step in by 1) joining the Board as an active investor, and 2) appointing its preferred CEO.

Some have argued that GTCR merely seeks to boost the stock price to exit, but this contradicts their low-turnover approach to investments, including their stake in public companies like Peloton. This leads me to believe that GTCR is accumulating more shares as I write this.

Breaking down its commons position

It owns 14 million shares as of June 30, with a likely cost of $3.22 per share, representing 3.775% of the company’s shares outstanding (CSO). While GTCR has a history of fully buying out closely-held companies, that is unlikely to be the case here. If its purpose is to influence the board, a significant ownership stake is generally around 5% to 10% or more, which can provide leverage in discussions with the company. GTCR would need to acquire at least another 5-6 million shares to surpass the 5% threshold, which would require the firm to file a Schedule 13D, indicating control intent.

My speculation is that GTCR will continue to buy shares throughout this quarter and beyond to gain leverage with the board, especially as the company searches for a permanent CEO. The timing seems well-suited for both Peloton’s corporate restructuring and GTCR’s long-term strategy to influence control of the company. We will know more next quarter from its 13F disclosure.

Earnings, earnings, earnings

I will not speculate on the exact numbers and estimates before Peloton’s Q4 earnings report on August 22. It’s a bit of a fool’s game at the moment. However, I am looking for insights into subscription churn rate, revenue growth, and further cost reductions. In the meantime, I plan to build a LEAPS position in the coming weeks, following GTCR’s likely increasing stake in Peloton.

*I have '25 and '26 call LEAPS to test its liquidity and spread.

This article was originally published on August 19, 2024 before Peloton’s Q4 earnings report on X via @GeorgeC1953

Slow day at the office, usually the case mid-August, so here's something I've been mulling over the weekend. Here's a long, boomer post and it's been awhile.

13Fs - Large Institutions

I spent some time digging through Peloton's financials, earnings, and disclosures. What initially piqued my interest was going through the recent 13F disclosures, notably BlackRock, Greenlight, and GTCR accumulating shares last Q.

BlackRock "buys everything" but for a passive fund it has increased its stake by 55%, representing 9.5M shares. Einhorn's new position with 6.7M shares is also notable for a classic "value" investor. Lastly, GTCR, a PE firm, opened a whopping position with 14M shares. What are they seeing that the retail is not?

While I do enjoy trading degen contracts, I’ve made the most money speculating on potential takeover bids, also my specialty in my legal practice. The idea of Peloton as a takeover target isn’t new. However, many are overlooking the fact that the fundamentals need to be strong before a takeover can happen.

My thesis on recent buying sprees by both passive and active funds is that Peloton’s interim leadership is turning the ship around—now generating positive free cash flow for the first time in over 3 years. The takeover thesis might be secondary to its fundamental shift in my view. Nonetheless, if a takeover does happen, I think I have an idea of which company it might be.

Q3 Highlights

Q3 Earnings dropped some crumbs as to what's to come in the coming quarters:

1. New permanent CEO will likely to be announced shortly – but I won't hold my breathe on whether they'll announce the new CEO during Q4 ER;

2. Continued positive Free Cash Flow via cost reduction and debt refinancing; and

3. Strong subscriptions:

We ended Q3 with 3.06 million paid connected fitness subscriptions, reflecting a net increase of 52,000 in the quarter. Average net monthly paid connected fitness subscription churn was 1.2%, which outperformed internal expectations...Our revenue consisted of $438 million of subscription Segment revenue, which represents 61% of total revenue, and $280 million of Connected Fitness segment revenue.

The average consumer sees Peloton primarily as a hardware company—essentially a “bike with an iPad”—but in reality, it’s a content company first and an equipment company second. They have a very loyal connected fitness subscriber base with 1.2% average net monthly churn as of Q3, which leads to my next point.

Partnership with Google

One recent news that did not get much traction was Peloton's partnership with Google on August 13th, a multi-year, multi-country partnership to offer a wide portfolio of Peloton classes to Fitbit Premium users, starting in early September. Google has been focusing on its health products with a history of buying out peripheral equipment companies. See Fitbit. Thus, if Peloton is to be bought out, it's likely to be Google in my opinion. Just an educated guess based on their platform synergy.

All in all, this solid statement from the CFO should give some comfort for a runway this year:

First off, I'm pleased that we have finally achieved the critical milestone of becoming free cash flow positive. And I am confident that we will be able to sustain it on a full year basis for fiscal year 2025. I'm also optimistic about the prospect of restructuring our debt and eliminating any potential concerns about the timing of our debt maturity.

Dogshit balance sheet *for now*

Peloton used net proceeds from the notes and new credit facilities to strategically repurchase approximately $800 million of 0% convertible senior notes due in 2026 at a discount, to refinance its existing term loan and revolving credit facilities.

So there's light at the end of the tunnel with their cost restructuring plan; it is to achieve $200M in run rate savings by the end of '25 and a significant share of those costs reductions are taking place immediately. Music to my ears.

Peloton Short Interest

Short interest has been increasing, which is understandable given the broken sentiment around this name. I don’t want to draw a direct comparison to Carvana before its turnaround, but the shorts covering played a large role in creating a reversal on the chart.

The best opportunities often arise when a situation appears dire—seemingly on the brink of bankruptcy—yet finds a way out. I would argue that last quarter’s positive FCF is that inflection point. Imagine if they report another quarter of positive FCF on August 22.

Sell-side's PTs are also pure dogshit

There isn’t much love from the Street, but the lower the expectations, the easier it is to surprise the herd.

Log scale chart necessary because it's shit

Without log-scale, there is no other way to see the weekly chart. As horrific as the chart seems, the chart is consolidating between $2.70 and $4. It's very likely that the aforementioned institutions added and/or opened their positions in this range; thus, there's institutional support around this area.

Peloton LEAPS for '25 and '26

Time and patience. That's it.

Either a fundamental turnaround or a takeover bid takes time, though I’d argue that a takeover will take longer than most assume. I’ve been involved in these deals, and they require many man-hours just to hash out the discovery and due diligence, including FCPA matters. As I’ve alluded, a fundamental turnaround always comes before a takeover bid, which, again, also takes time.

I’m personally liking December ’25 or January ’26 OTM calls around $5 or $7, as implied volatility has less impact on LEAPS after earnings. I think the best approach is to buy a few here and there, gradually building a position and then just waiting. Remember, it’s the sitting and waiting that make you money, right?

Q4 earnings are coming up on August 22nd. I plan on holding a few calls going in. I can stomach the volatility, but this is not for boy scouts.

It’s been awhile since I’ve updated my last post on Starbucks. I’ve been battling cancer over the past several months and had to take a break from any activities that would increase my blood pressure. The doctor said to stay away from the market, literally! Regardless, I had a successful surgery, am now in recovery, and am attentively watching the market for decent short-term setups.

Starbucks Debacle Post-Q2 Miss

The last two earnings results caused a mass market sell-off coupled with its CEO’s inability to counter the market narrative after the Q2 miss. I took a loss after Q1 earnings and didn’t hold a position going into Q2.

It’s still too early to tell whether the reversal has occurred on the weekly chart and if its horrid market outlook is priced in. I do believe there’s a short-term trend to go long, but it’s more than likely to be met with resistance at the “Covid Low” trendline, i.e., around $85. This could pose a decent trade to keep the strike extremely close to the current trading price at a $75 strike; conversely, OTM strikes are for selling.

Current Watchlist for Options

GoodRX

A ton to like about this stock fundamentally on the business side. It is moving on strategic partnerships with large retail chains, such as Kroger. It’s a category leader gaining market share and has an ambitious financial targets for the coming years. The management wants $1B in revenue and more than a 35% adjusted EBITDA margin. It is also building upon a nice looking Cup with Handle. I plan on going long on a minimum 45-DTE calls upon $8.52 break.

Walmart

Simple: the trend is your friend, and Q1 ER knocked it out of the park. The market share expansion in groceries is notable, given the high cost of food for most Americans. The mention of also garnering higher-income earners as customers sheds some light on the consumer shopping trend. All in all, the superb ER results triggered higher PT revisions by sell-side analysts, with the median PT around $70. It’s currently trading at $65, and low-IV proposes a decent LEAPS configuration. A true ATM LEAPS could be wonderful here in lieu of shares, especially configured with high delta.

Oscar Health

Oscar Health recently broke out of its multiyear Cup with Handle, but it seems to want to base around the Handle breakout area or WMA-10. This is receiving institutional support as of late with strong above-average volume. Oscar is set to discuss its 3-year strategy with financial targets at its upcoming Investor Day, focusing on future growth opportunities. The key here is its strong enrollment growth, as well as its solid Relative Strength. I think it’s slightly early to get in, but I’d like to see it test WMA-10 first before going long. The options chain is also robust. Watching for basing and consolidation on the weekly chart — $20 strikes with at least 90-DTE.

All in All…

I’m still alive and well. Hopefully, I’ll be able to update more regularly. Until then, please enjoy the sun on my behalf.

The Q1 Earnings Report was better than the Street feared.

It’s been a whirlwind of emotions in the past several days after Starbucks reported its Q4 earnings. Was it stellar? No. However, it did “exceed” the Street's expectations by not announcing an apocalypse in China. It missed the Street’s EPS estimate of $0.94, reporting $0.90 actual, and a revenue estimate of $9.6 billion compared to $9.4 billion. As I mentioned in my previous post, much of the earnings hinged on CEO Narasimhan’s outlook comments and the reaffirmation of its fiscal year guidance.

For a company that profits from foot traffic to its stores, I find it amusing that it has been able to increase its global operating margin in double digits and boost its EPS by more than 20% YoY in the midst of Middle East turmoil. That said, it was CFO Ruggeri’s commentary on strong foot traffic that, I believe, calmed the Street:

Overall, our traffic continues to be strong and it's growing. So, when you look at the success of our performance in the quarter, particularly in the US, our highest-ever average weekly sales were driven by a combination of strength in traffic, but also strength in overall ticket. And we saw a record number of customers coming into our stores and spending a record amount. Now, those customers are both our Rewards customers as well as our non-Starbucks Rewards customers. So, we're seeing growth in our customer base across our segments and that's driving strong performance as each customer is spending more.

I was glued to the after-hours chart when the comment was made, propelling the stock 3-4% during the Q&A session. It’s not to say that the management gave a stellar outlook, given various headwinds mentioned. Nevertheless, it exceeded the Street’s expectations, despite falling short on both top and bottom lines.

All in all, I was pleased with my speculative thesis and nailing most of them: 1) the worst was priced in; 2) comparable sales were 5%, higher than what most assumed at 4%; and 3) 7% growth internationally, particularly strong numbers from China.

But the market never ceases to amaze when I thought I’ve seen it all

Throughout after-hours and pre-market following the earnings call, there was strong volume, with the stock price reaching $98.36 in premarket trading, 4-5% gain. However, the situation took a sharp turn at the market open when Google's subpar cloud business results negatively affected market sentiment, just before the FOMC released its statement on rates. At the open on January 31, Starbucks experienced a sell-off in large block orders despite showing strong volume in the pre-market, which is often indicative of a manipulation campaign aimed at generating liquidity for large positions to exit.

Implied Volatility glitched, Vega crushed, and Bid-Ask Spread Broke

What a horrid sight it was at open for the options chain and my feeble mind could not immediately grasp what was occuring before my eyes. Here’s how the March $100 calls behaved:

• Hours before the ER on January 30, the contract was trading around $1.50.

• At open for a few seconds a few contracts sold for $2.09, a 39% gain. By any standard, this is a meager gain compared to the underlying gap-up open.

• Starbucks opened at $98.36, only to head down lower to $93.11 by 11:30am.

• The said contract premium crashed from $2.10 to $0.46 by 11:30am.

As long as I've traded options, I've never seen the contract premium at open unable to calibrate to the Greeks correctly. My immediate reaction was that perhaps my ThinkorSwim was experiencing a temporary glitch, but no.

My educated guess is that there were pending large Market-On-Open sale orders that needed to be filled, while inexperienced traders bought in after seeing the AH/PM volume. However, the demand could not overcome the supply in that split second, causing the Vega to crush. Subsequently, the underlying sold off after that initial reaction.

In the industry, we call this bullshit.

Another oddity was the Historical Implied Volatility on these contracts. They were released in December, so the Greeks adjusted to a thin set of data going back merely three months. In my experience, the longer contracts have been trading in the market, the higher the likelihood that the premium will align with the correct theoretical value.

My fumble was underestimating the options market makers' ability to erode the premium outside $1-2 deviation from the current price. I could blame the OMMs or the market for this oversight, but ultimately, I'm fully responsible for my own trades. Again, I should’ve recognized that it lacked the historical data to gauge future implied volatility. It took me several days to come to terms with what had happened, and I now acknowledge that it was an outlier, a two sigma event – but not all hope is lost, at least not yet. It's just a small bump on the road.

Onto the Technicals

With the ex-dividend date on February 8 and the general market being bullish for the week, it experienced one of the largest gains in months, at 3.42% on the 6th, settling above both the EMA-13 at 93.46 and the EMA-65 at 95.21. For reference, most dividend stocks tend to surge leading into the ex-date and pull back slightly on the day of, since it's the last day to be a “record holder.” But I digress.

My favorite moving averages, the daily EMA 13 and 65, are about to cross over. I've been told that they're also institutions' favorite markers for blue-chip and dividend stocks. Additionally, the stock closed above the daily SMA 200 (97.14) for the first time since last August! The momentum is building, and it's a positive sign despite the options fiasco in the earnings report. It just means that OMMs are making it clear that out-of-the-money options have nothing but time value for the time being.

Another bullish aspect is that the weekly chart is hitting (almost) all the marks:

• Weekly pivot point is at 98.87, an area that could propel higher upon settling above;

• Weekly MACD curling;

• Settled above WMA-10 (94.15) and WMA-30 (95.93);

• Above average volume the past two weeks; and

• Finally waiting for WMA-10 and WMA-30 to cross over.

It’s best to let it brew, as it’s a slower churning ship.

Sell Side Targets and Corporate Events

One crucial aspect for a retail trader like myself to be aware of, especially for a stock heavily owned by institutions, is how Street analysts perceive the stock after significant earnings reports. This is because their assessments often drive stock movements, rather than retail traders. The average price target set by analysts is $107.88, whereas the stock closed at $97.30 on February 9th, indicating a potential 10.87% upside from the current spot.

Here, Starbucks is owned 73% by institutions with remaining float held by retail. Except for Schultz who owns 1.9% of the outstanding shares, there are no other notable insiders. Again, this is an institutional “darling.”

Buyback. Furthermore, from October 2, 2023 to December 31, 2023, the company has repurchased 12,778,291 shares, representing 1.12% for $1,250.1 million. With this, the company has completed the repurchase of 670,188,630 shares, representing 48.52% for $34,946.31 million under the buyback announced on August 2, 2006.

I believe that $105 is within reach in the coming weeks – and potentially higher if we receive positive news regarding Apollo’s potential purchase of a minority stake in the Middle East, North Africa, and central Asia. Again, Starbucks mentioned that sales were significantly impacted by the conflict, both in the Middle East and in the U.S., as some ill-informed consumers launched protests and boycott campaigns, urging the company to take a stance on the issue. However, Starbucks' growth driver lies in its international segment.

It seemed fitting that an unusual LEAP order came in the day before Reuters dropped the news about Apollo. I don’t believe options orders are random coincidences; rather, they often represent a microcosm of a future event and capitalize on the market's surprise factor. Well, at the very least, it churned the volume for the week.

TL;DR

Let it brew.

Disclaimer: I have Starbucks calls in my portfolio. Enter at your own risk. This is not for boy scouts, nor is it financial advice.

From McDonald’s to Starbucks: Sentiment Dumpster Diving

On January 19, the University of Michigan’s Survey of Consumers showed a reading of 78.8 for January, its highest level since July 2021. On a two-month basis, sentiment showed its largest increase since 1991. This news boded well for the market – except for Starbucks.

I’ve been adding to SBUX since last December amid horrid sentiment surrounding the “boycott” misdirection, union troubles, and a slowing China growth story. It’s certainly not for everyone to go long on a stock that “seems” to be dealing with a deteriorating brand image. However, I’ve found that my most successful options trades have been betting on the thin line between the probability of an ameliorating sentiment gap and nullified IV on call options. See McDonald’s in October ‘23.

The Familiar Support and Resistance Zone since 2019

There is nothing to marvel at when examining the weekly chart, which seems to be stuck in purgatory as it heads into Q1 ER on January 30th. In my view, this is merely illustrative of the perceived fundamental problems playing out on the weekly chart. Nonetheless, this marks a pivotal support-and-resistance area going back more than four years, a low risk area to add.

Though technical analysis generally takes precedence over fundamentals in short-term trades, particularly with options, I believe much of the trade hinges on the CEO and the management’s commentary during the earnings call regarding its expansion efforts in China and on its attempt to soothe the tension between the company and its employees’ union. It needs a positive spin that drizzles Bloomberg Terminal with a series of headline grabs.

This cup of latte is getting quite cheap, sans the extra syrup pump

One interesting factoid is that today’s Daily Price/Normalized EPS is hovering around 31, a ratio last seen in July 2022. Daily Forward P/E is exhibiting similar relative value, though I should mention that its industry has an average Forward P/E of 17.95, which means Starbucks is trading at a premium to the group at 22.76.

I’m also in the valuation camp that the more “expensive” names have reasons for their premium valuation within their industry. In this case, it’s the brand moat outside the U.S. territory, simply having to pay more for quality. More importantly, it is relatively cheap to its own historical valuation.

“Low” ratios, however, are often just headline grabs on Bloomberg Terminal and in the financial news circuit, especially given my short-term trade with call contracts expiring in March. Fundamental ratios are generally forward-looking, and their implications are already priced into the current stock price. Therefore, I won’t dip too deep into its valuation.

Blame the Sell-side Analysts for the Drawdown This Past Quarter

As for the recent downdraft, I believe it’s attributable to analysts from JPMorgan, TD Cowen, and others who forecast U.S. comparable sales growth to be around 4% instead of 6%, with sales of $9.7B vs. the estimated $9.88B for the same quarter YoY in Q1. In my view, they're giving too much weight to the boycotts impacting its comparable sales. Certainly, there are some stores affected by these issues, e.g., vandalism, threats, etc., but the impact seems to be overblown based on my visits to numerous stores. Yes, I’m a Lynch acolyte.

All in all, the sell-side’s hesitancy to recommend the stock seems to arise from the lower comparable sales. However, I'd argue that most Americans do not care about the company’s lack of a political stance; they just want their quick caffeine injection every morning.

What’s in Store for ‘24 Q1 Earnings

China

As of October 1, 2023, there were 6,804 company-operated stores and plans to expand further while other U.S. companies cannot seem leave this key demographic market soon enough. By 2025, Starbucks will have expanded to have 9,000 stores in that market.

My conclusions are based on my own travels to Beijing and to Shanghai on work matters. Some personal anecdotes from my travels. The locals in China tend to gather and socialize at coffee shops and stripmalls during extreme weathers, both hot and cold, for valid reasons. Heck, I even recall having the most important business meeting of my legal career in a packed Reserve in Shanghai.

On a side note, have I mention that it recently broke a “seven-decade cold weather record” in Beijing and in its nearby cities? I’m sure some locals spent some time at their Starbucks this winter. And why not convert the tea drinkers to coffee?

India

Starbucks plans to operate 1,000 stores in India by 2028, essentially opening one new store every three days. It also expects to double its workforce in India to about 8,600 employees. It currently has more than 390 stores across 54 cities in India through a JV with local partner Tata Starbucks. Reinforcing this news during the Q&A section could rejuvenate institutional bulls who questioned its growth strategy.

I personally want to hear more about this expansion effort.

Union Tension

The Strategic Organizing Center (SOC) sent a letter to its fellow shareholders outlining why enhanced oversight and proven human capital management expertise are needed on the Starbucks Board and nominated their members.

Drawing on my experience as an in-house counsel for a public company, I'm quite familiar with this area. In my opinion, I believe HQ was not prepared for the unionizing tsunami, which caught them off-guard, and they are now shooting from the hip. How the management decide to pivot their narrative could be a harbinger for inflow in the coming weeks after the earnings.

The Supreme Court also granted Starbucks' petition to consider creating a level playing field for U.S. employers on January 16. This could be an interesting turn of events if the Supreme Court finds in favor of Starbucks, denying injunctions under Section 10(j) of the National Labor Relations Act before the merits of an unfair labor practice case are fully evaluated.

Boycotts

As for the publicity surrounding boycotts, Narasimhan is likely to reiterate the memo he released to employees on December 20:

Many of our stores have experienced incidents of vandalism. We see protestors influenced by misrepresentation on social media of what we stand for.

My take is this shall pass.

Top and Bottom lines

This is where I’m seeing more mixed bag on EPS and Revenue estimates. As I’ve mentioned above the sell-side estimates have been putting much weight to the impact of boycotts on sales stemming from the Middle East unrest. The Narasimhan’s memo likely also confirmed their bias on slight subdued comparable sales.

The market expects that Starbucks will report quarterly EPS of $0.93 in its upcoming release, pointing to a YoY increase of 24%. It is anticipated that revenues will amount to $9.59B, an increase of 10% compared to the quarter a year ago. I’m in the camp that comparable sales growth for Q1 to be above 5% vs. JPM’s 4%.

The company missed EPS estimates for the last two Q1 ERs, explaining the sell-side’s reluctance to upgrade prior to this Q1 ER. As of January 26, there are 7 Buy ratings and 11 Holds. What is significant in these analysts’ recommendations is that, because Starbucks is heavily owned by institutions, it has a consequential impact on short-term swing traders like myself, let alone options traders. I’d argue that their analysis is meaningless and inconsequential in a span of more than six months.

However, it's critical to remember that options premiums move based on implied volatility, meaning that a “surprise” to those issuing recommendations is what drives Vega to surge or nullify.

At the moment, the implied volatility for my contract premiums is hovering in the mid-20s. The premiums are cheap because they have been staying in this range for weeks.

The “Secret Sauce” to Starbucks Trade

For a name that’s heavily owned by institutions, it matters where they peg their price targets at, as illustrated above.

Historically, Starbucks has rarely passed above its daily target price, i.e., when to sell, yet below Low CIQ PTs in the past have generally yielded good areas to add.

Here, it has been hovering below the Low CIQ PT on the daily chart for weeks, one of the primary reasons why I’ve been adding to my March call positions since last December to cover the upcoming ER and its (possible) subsequent move towards CIQ’s Daily Target Price of $110. It’s an ambitious bet as it currently trades at $92.61; however, it does not even have to be in-the-money for the trade to be profitable.

This is an arbitrage trade on market sentiment and cheap premium on a strong American brand name that is trading cheaply compared to its historical valuation.

Did I also mention that its short interest has been rising significantly since the boycott and union news plaguing the newscycle? A decent earnings next week will take care of them, quite quickly.

All in all, it’s worth the risk in my view

For the foregoing reasons, I’ve been adding to my Starbucks position in March calls. The implied volatility could crush at a moment's notice, but that's part of the trade: understanding why the premiums crumble despite the stagnant underlying price action. It’s merely a paper loss before the key event.

Theoretical options pricing is often not calibrated correctly for OTM calls when the stock tends to trade sideways for weeks. Many assume it's Theta decaying, but more often than not, it's just a lack of volume with low Open Interest.

In a few days, we will know if all the bad news, including its top and bottom line estimates, has been priced in.

Disclaimer: I have Starbucks ‘24 March OTM calls in my portfolio. Enter at your own risk. This is not for boy scouts, nor is it financial advice.

2024 is more than likely to be a wild one if the first two weeks of January hasn’t dropped the crumbs already.

The last Year of the Dragon in 2012 followed a period of recovery from the global financial crisis of 2008 – and also the year when Obama secured his second term. We have an election year that could wildly swing the market. Here’s what I’ve observed through my own trading and historical data points:

Since World War II, the S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%. That compared to the index's average annual return of 12.8% in the same period.1

Couple this with the Fed likely to cut rates in H1 of ‘24 and slow down the balance sheet reduction, this combined macro juncture is likely to increase liquidity into the market for the election year. I’ve been told in the past from other prolific traders that going long during Q2 has been a decent bet in such reelection year.

As an options trader in an election cycle, I’m more inclined to engage in swing trading on a shorter timeframe, typically between 1 to 3 months, as opposed to the 6 to 8 months holding period. My focus lies primarily on technicals, corporate events, and macro trends. Moreover, I have a tendency to start raising cash in the mid-January to sit on the side, observe, and possibly identify weak sectors to short based on seasonality. In either case, Q1 will likely be choppy, rewarding mainly those who can take profits quickly without becoming overly enamored in a position or a company.

Position Update for January ‘24

Lamb Weston ($LW): The “Rolls-Royce” of French Fries

Lamb Weston is the leading supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the world. Did I also mention that it’s the 5th largest position in Duquesne Family Office?

Druckenmiller’s position in his portfolio is reassuring, but what initially caught my attention was my research into its commercial customers. If you've ever wondered who supplies McDonald’s classic fries, you guessed it. Troy Grimes, Director at Lamb Weston, noted that “[it] can dig anywhere from a thousand to twenty-four hundred tons of potatoes per day…and the majority of these will go into McDonald’s Fries”.2

A trade in LW is a bet on a high-volume, margin-expansion business within the QSR segment, operating in the potato-farm processing oligopoly. Besides, foodservice and retail are large revenue drivers. This is just a high-level overview of the company, and I'll provide a more comprehensive write-up on its fundamentals and business at a later time (hint: it’s stellar). It, however, met my overall criteria to go long after its Q2 earnings call.

There was an initial surge after the earnings call on January 4, reaching a peak at $111.88. However, large institutions sold into the strength and volume at the open after its top and bottom line beat announcement in the pre-market. Similar reactions occurred in the last few earnings. With 89.20% of outstanding shares owned by institutions, it’s plausible that some funds might be looking to take profit and rotate out of their positions. Nothing alarming in my opinion.

I opened $110 OTM calls expiring on April 19, 2024, with the expectation that Q3 earnings on April 4 will deliver based on its FY guidance. Technically, the chart is also exhibiting a Golden Cross and MFI divergence in the short term. The ex-date is on February 1, with the expectation of a small run-up to it. This is a short-term trade with a price target between $112 and $115 in the coming weeks.

Starbucks ($SBUX): Horrid sentiment, nullified premium trade

This ubiquitous coffee chain requires a separate post that unpacks its thorny PR issues around the brand sentiment. I’ll do it soon. I opened a small March OTM call position on December 6, 2023 with the thesis that corporate’s talk with the union will occur sometime in January, a period also covering its Q1 earnings on February 2.

I’ve been adding slowly on the thesis that the Q4 ER gap is unlikely to be completely filled but the higher than expected CPI and PPI prints last week caused it to do so otherwise. More than the RSI, because Money Flow Index incorporates volume into its metrics, I tend to put a bit of weight to its divergence from the stock price movements. More here. Though I have paperloss on the trade since increasing my stake for the past two weeks, my bet is that the trade is early.

McDonald’s ($MCD): McGoldenCross

McDonald’s OTM call trade from October through December yielded exceptional results, though it would be remiss to assert that it didn’t cause heartburn at various points in the trade due to Vega collapsing. For the week of January 8, I took majority of the profits on my last tranche of OTM calls expiring on January 19. It made the Golden Cross, SMA 50/200 day crossover, a few days ago. Thus, $299.99 could be another test before Q4 earnings on February 5 – unless the market sees this area as a Head-and-Shoulder formation in the coming weeks.

Build-A-Bear Workshop ($BBW): A Bullish Long Term but in Purgatory

My last post on BBW discussed Build-a-Bear’s Q3 earnings results and the “softness” the management had pointed out. The stock retreated over the past several weeks, but I would argue that the multiples are now aligning with my favorite “Cigar Butt” territory, i.e., a GARP trade.

In my view, it is currently heading towards the time-tested support area between $21 and $22 before a trend change. On another note, I was disappointed that BBW did not participate in the 2024 ICR Conference, as they have done in the past during the first week of January. They often announced FY Guidance at the event, but unfortunately, not this year. I do not take this as a good sign and plan on taking a loss on this trade for the January ‘24 OTM calls expiring this week. This is the inherent risk of trading options based on corporate events – but also do believe that Build-a-Bear offers a gratifying trade in the long run if one can endure volatility. I’m stepping away for now.

2024 will reward those who can be tactical and nimble.

All in all, no one can foresee how the market will behave during this year’s election cycle, especially with the Fed likely to loosen its policies and geopolitical risks once again plaguing the supply chain. All we can do is make educated guesses, skewing the probabilities toward our speculation while minimizing losses through position sizing. Regardless, it will be a fun year of trading.

Disclaimer: I have long options positions in the aforementioned companies, and this post does not constitute financial advice.

It’s approaching the end of the year, and I’ve been swamped tidying up loose ends. My focus has been on the McDonald’s trade around its Investor Day news and subsequent momentum events while trimming other profitable positions, namely, TSM and KO call positions not discussed here.

No, I haven’t forgotten about Build-A-Bear Workshop’s Q3 ER as I still do have a position as of December 27, 2023. I had to reread their ER transcript again prior to this post to grasp their reason for guiding down for ‘23 EoY. All in all, I will not mask my slight annoyance with the management's word-salad statements and its responses to the Q&A session during their Q3 ER call.

"Good but not great"

Key Data Points1:

• Total revenues were $107.6 million and increased 2.9%

  • Net retail sales were $100.4 million and increased 1.2%

  • Consolidated e-commerce demand (online orders fulfilled from either the Company’s warehouse or its stores) increased 7.1%

  • Commercial and international franchise revenues were a combined $7.2 million and increased 36.2%

• Diluted EPS was $0.53, a 3.9% year-over-year increase driven by pre-tax margin expansion and a reduction in share count, offset by an increase in tax rate.

• EBITDA grew 3.0% to $13.3 million, or 12.4% of total revenues.

One key metric to focus on is its ability to consistently generate a margin percentage of 14-16% over the past three years. While impressive, the earnings fell short on two key variables: 1) the C-Suite's statement of 'unexpected softness;' and 2) the possible interpretation that its year-over-year revenue growth is contracting.

Nonetheless, I don't mind trading and owning a company with an EBITDA margin % hovering near 15% YoY. It's still impressive for a company that sells teddy bears made from synthetic materials abroad.

Q3 Earnings PR Fumble

However, when the stock is not widely covered by the Street, it’s imperative that every word said during the opening remarks for an earnings call is crisp and absent of ambiguity. Yet, the PR team fumbled:

As noted in this morning's press release, while we have revised our guidance to reflect some unexpected softness in the business starting in the latter part of October and continuing into November, we intend to stay focused on delivering our fourth quarter plans during the remainder of the most critical holiday shopping period as we continue to expect to deliver our third consecutive record-breaking year. Our results represent the best ever third quarter and first 9 months revenue and pretax income in Build-A-Bear history.

Starting out the CEO’s opening remarks with “softness” is how you leave a first impression on the quarter. Then during the Q&A, CEO John tried to clarify the “softness” as a result of general weakness in consumer spending due to macro headwinds. Then came this:

Definitely, as we talked about our results and our finish to Q3 was softer than what we expected. And as we mentioned in our November results only in the month have continued at that pace. But like later in November, and as we said right now as we are entering into December, our trends have reversed. So like we are contemplating that as we are projecting for our Q4 and fiscal year results EBIT in our guidance.

The opening remark should have started with meeting its EBIT fiscal guidance, not on some temporary weakness that reversed later in the quarter. On a bright side, did I mention the PEG is now at 0.22 post-earnings?

A possible special dividend announcement in ‘24?

I personally have some gripes about its lackluster business model, but that is for another day. It’s a very conservative management afterall.

In the short-term, I believe they have the bandwidth to announce another special dividend with their $25M and its cash from operation. The last special dividend was announced on March 22, 2023 in the amount of $1.50/share. However, I do not see one being announced before my calls expire in January ‘24.

Surprisingly low volume & technical analysis

The Q3 earnings debacle exacerbated the sell-off in December, with the stock trading inversely to the Russell 2000 and diverging from other small-cap industry peers. Given the 13M shares float, it's likely that tax loss selling and portfolio rebalancing on low volume are the culprits behind the recent pullback in the stock price.

I’ve been adding ‘23 January calls since mid-November and post Q3 earnings on seasonality and on signs of technical reversal.

BBW’s Volume and Candlestick Analysis

I've annotated some technical markers that could indicate a reversal from the current closing price of $23.21. In the last session on December 22, there was an Inverse Hammer candlestick on the daily chart, followed by a strong Hammer with above-average volume on December 26.

Furthermore, it is showing signs of accumulation after forming a possible Triple Bottom pattern, which is a bullish reversal chart pattern that typically appears after a downtrend. However, it's important to note that these are just crumbs on the chart, indicating a probability of a reversal — a “more than likely” chance.

Position going into Jan ‘24

I hold OTM calls expiring in January ‘24, and this trade carries certain risks associated with the trade, notably, liquidity and low delta. As these contracts are out-of-the-money, the sole value of the contract premiums are derived from time value. Thus, the success of the the trade hinges on strong volume orders pushing Vega higher, i.e., IV on premium, on the assumption that it never goes in-the-money.

All in all, my bet is on a reversal in the coming weeks.

Disclaimer: I have a long position in BBW, with OTM calls expiring on January 19, 2024. This is a very risky trade but I can stomach volatility.

After months of holding, McPowell delivered the $295 Price Target

I did not expect Powell to be as dovish as he was at December ‘23 FOMC. The Fed held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond. This “surprise” announcement pushed the indexes much higher after 2pm, including McDonald’s.

Buying is easy, selling is hard

The January ‘24 $295 calls I’ve been holding since August surged beyond my expectations. The underlying on October 6 was $244.47 while my call premium yielded meager $0.30. Today, the same contracts closed at $5.90 with the underlying at $295.93. A whopping 1,866% gain.

I discussed trimming the same contracts on November 29 and am glad I did then. It’s foolish to look back on my earlier profit-taking and have remorse today when the underlying is trading higher. Trading is about probabilities, not certainties. It’s absolutely unreasonable to think that one can enter the bottom and sell the top. In the long run, selling into advances, by laddering, is how you win this game.

There are no set rules on profit-taking; however, as an options trader, it's prudent to shift the focus from the gains percentage of the premium to the underlying price target. Focusing too much on the percentage of premium alone can leave massive gains on the table because a trader might be overlooking the big picture. It’s called a derivative for a reason — and, ultimately, the underlying price target and action are what truly matter.

McDonald’s Final Boss: The Big Picture

One of the toughest, discomforting moments in trading, whether commons or equities, is knowing when to sell – when in fact it should be a joyous occasion for taking profit. Our fallacy is that we hold when we should sell, vice versa, sell when we should hold.

How do you overcome this typical human impediment?

Examine the weekly and monthly charts, in that order.

For example, the daily “indicators” for McDonald’s have been flashing "oversold” for a few days now – but it’s secondary to the weekly chart many institutions rely on. Here, it’s still on an uptrend and is about to test the key area ($295.98) from July ‘23; closed at $295.93 as of December 14.

If it closes and settles above this ATH, the next PT is likely to be above $300. This is because there are less large volume, block institutional sellers above the ATH and applies to other names as well.

The 20-year monthly chart shows an acceleration in its stock price, particularly in the years 2015-16, with a discernible angle of attack increasing from 20-30 degrees to 45 degrees on the chart. McDonald’s price movement the past three months only confirmed this trend. Thus, if the Investor Day Presentation provided any forward pricing power on its business expansion, it’s more than likely that it’ll push through the two areas: 1) the ATH at $295.98; and 2) the psychological barrier at $300.

Alignment of macro data, fundamentals, and technical analysis

All in all, many key variables are aligning for McDonald’s to reach a higher high. These trades offer higher probability of success over trying to bottom-fish a position. While bottom fishing may yield better returns, the success rates are often much lower.

When in doubt about when to sell, doing the opposite of your initial impulse might be the right move.

Disclaimer: I have OTM ‘24 calls in my portfolio. Enter at your own risk, seriously. This is not for boy scouts.

I’ve been away on work matters and am finally getting a chance to finish this McDonald’s post I’ve been wanting to update for a week. It’s been a strong month after all.

Dalio’s 13F filing for Q3 2023: Upping the stakes in McDonald’s

Dalio’s firm has been heavily increasing its stake in consumer staples and discretionary the past several quarters. This includes its stake in McDonald’s in Q3 together with KO and COST. His firm’s 13F was released on November 16 giving strong boost and volume to McDonald’s price action that day.

McRib news percolating throughout the news outlets

As a student of the market for years, I’ve come to believe that the timing of release of good news is of no coincidence. Livermore used to call these “campaigns” to disseminate news that would benefit the Deep Pockets at the precise moment. Today, these campaigns are done through the release of headlines that grab the attention of institutional investors with access to Bloomberg Terminal. MarketWatch headlines generally dominate the newscycle and the McRib’s story compounded the volume on November 16.

McDonald’s to Acquire Carlyle's Stake in Its China Operation

Likely due to private equity woes in China, McDonald’s and Carlyle Group mutually agreed upon McDonald's acquiring the 28% ownership stake in the strategic partnership that operates and manages its business in mainland China, Hong Kong and Macau. Previously this minority ownership stake was held by Carlyle. McDonald's will remain a minority partner while increasing its stake from 20% to 48% ownership.

Investor Day likely to reveal the new concept restaurant: CosMc’s

McDonald’s has been working on a new restaurant concept called "CosMc," which it revealed during its Q2 ER call on July 27. They will be tested in a small handful of sites in a limited geography beginning early next year.

CosMc’s pays tribute to the six-armed alien-robot hybrid character of the same name that relocated to McDonaldland after discovering McDonald’s burgers and fries. Based on a few spy photos taken near MCD HQ, it’s giving off Dutch Bros-vibe, possibly focusing on drive through custom drinks and carry out experience. This is a game changer for a legacy company that has thrived on the mantra, “if it ain't broke, don't fix it.”

It’s my guess that MCD will announce the news on December 6 during the Investor Day presentation. I’m also uncertain whether the market has priced in CosMc’s news for 2024, given its consolidation and distribution in the $280-282 area.

Position Update as of 11/29

I’m only human — and instead of cutting losses during the Ozempic Panic from $280 to $245, I doubled down on OTM ‘24 calls on its reversal and trimmed half of my position for 170% profit on November 22.

Catching a falling knife is considered one of the deadly sins in trading, particularly with commons. It’s something I still struggle with to this day because who doesn’t suffer from the sunk cost fallacy? One exception to this common rule, however, arises when the chart shows signs of accumulation and basing for a reversal. The reward can be worthwhile if a trader can recognize this reversal early on and take the risk on the relative strength and volatility inherent in options by averaging up. This, of course, assumes that fundamentals and growth acceleration remain the same.

Increasing MCD position leading into Investor Day on December 6

Today, November 30, is ex-dividend so it has a tendency to pullback for a few days. But this is also a great opportunity to add if in options with the upcoming Investor Day presentation on CosMc’s.

Technically, I see a short term retest of the MA-30 area between $277-280 but my PT of $295 still stands before the year. Whether breaking through $300 will depend on Kempczinski‘s optimism for FY2024.

I’m excited for next week.

Disclaimer: I have OTM ‘24 calls in my portfolio. Enter at your own risk, seriously. This is not for boy scouts.

Jakks Pacific ($JAKK) had a “perfect” Q3 earnings call

I am a proponent of consumer sectoral trades, especially involving small cap companies around earnings season. This is because I’m a simple man that prefers to analyze widget businesses – and Build-A-Bear and Jakks Pacific are two businesses I can understand.

On November 1, Jakks reported its 3Q results with an impressive year-to-date Gross Margin of 32+%, highest level since 2011, and up 600 basis points vs. Q3 2022. Now that’s impressive.

Other highlights:

• Gross profit of $107.0 million, up 16% compared to $91.9 million in Q3 2022.

• Cash and cash equivalents totaled $96.4 million as of September 30, 2023 compared to $76.6 million as of September 30, 2022, and $85.5 million as of December 31, 2022.

• Total debt was zero, compared to $67.7 million as of September 30, 2022, and $67.2 million as of December 31, 2022.

Jakks’ earnings call commentary on seasonality

Jakks’ CEO, Stephen Berman, noted something that caught my eye regarding seasonality and Halloween sales in general:

Last quarter, we discussed how the seasonality has moved around this year. So we saw it catching up this quarter with a 19% year-over-year growth in Q3…especially having third quarter and fourth quarter being as strong because of Halloween and the actual holiday season.

Berman also hinted that their popular segments on Nintendo and Disney IP have been very popular this season. Again, tailwind from the summer blockbusters.

His analysis on JAKK’s price demographic is also noteworthy:

I think it's over 70% is under $40 at retail and a good portion of it is under $20. So we're in the right category of business, and we're right for the holidays.

Trading Jakk’s Pacific: Extended for now

All in all, I am watching JAKK as closely as BBW to go long but it’s well extended beyond my preferable entry point near Weekly MA-10 at $20.20, with the current spot at $28.18.

Hovering over 40% from the Weekly 10-MA after the Q3 earnings breakout is not an ideal entry, in my opinion, as it is exhibiting some distribution on the weekly chart. This could be a very good trade if it can retest and bounce off of WMA-10. I’ll watch on the sidelines as it consolidates near my preferential entry point.

Build-A-Bear’s Q3 Halloween sales and early holiday shopping

It has been my experience that Jakks earnings results provide a reasonable guidance for the Build-A-Bear demographic and its seasonal trend. Here, I wouldn’t be surprised if we see some overlapping congruence between the two companies, especially with BBW’s Halloween segment being wildly popular. The Gallop data from a month ago also seems to align with Jakks’ consumer sentiment:

Build-A-Bear’s Q3 Earnings Preview

There’s a lot to like about BBW’s ER this season. I’ll reinforce the point that it has fantastic fundamentals, a disciplined, albeit slightly conservative management, and a strong retail moat in both online and physical channels. Build-A-Bear’s price range, between $15 and $50, is also in an ideal spot that is quite popular with typical holiday toy shoppers.

The Gross Profit Margin has been in the range of 50% year-over-year, and BBW's fiscal year 2023 has 53 weeks compared to 52 weeks in 2022. This is estimated to be additional $7 million in total revenues with approximately 35% flowing through to EBITDA. This could potentially mean an upper-range guidance for FY2023.

The Street is expecting Build-A-Bear to report $0.51 EPS and $108.11M in revenue. Sell-side analysts miscalculated its earnings results last quarter, which, in my view, is good news—an opportunity to trade the expectations disconnect. One benefit of low coverage by the sell-side is that their expectations are often misguided and overlooked when it comes to actual earnings performance. Nor are they likely to carry out Lynch-type research to see the hype around Pompompurin™ sets.

I expect that BBW will secure at least $0.54 EPS and $110M in revenue this quarter, covering the Halloween season.1

I’d also like to point out that BBW’s seasonality for December and January has been strong over the past 5 years. This trend might demonstrate its tendency to align with other toy subsectors during the holiday months. It supports the thesis that this period could yield a profitable trade going into Q3 earnings and beyond.

Current Positioning in Build-A-Bear

I added a few ‘24 Jan calls to backtest their liquidity and bid-and-ask spread. So far, the calls are widely in $0.05 increments, which is not ideal considering the premium is priced below $1. One impediment in this trade – but I’ve found them to be more liquid after earnings. I plan on cautiously adding additional calls this week, both ITM and OTM, to increase my stake leading into the earnings. A pivotal week, nonetheless.

Disclaimer: I have a long position in BBW, with calls expiring on January 19, 2024.

Focusing on the charts and volume

McDonald’s nailed its earnings on October 30th and now the market is in an accumulation period leading into 2023 Investor Update event on December 6. For the time being, it has broken out of the Cup with Handle:

Monthly MA-65: Monthly in Purgatory

McDonald’s is quite sensitive to the 65 Monthly Moving Average, and the follow throughs tend to materialize when the stock price can breakthrough MA-65. It was rejected this week and will need to fight through the $270 resistance wall ($269.85) before confirming the uptrend traction.

Weekly SMA 10 & 30 Volume Analysis: Tight close, volume dry up

The good news is that it has solidly closed above the weekly MA-10 with a tight DOJI close for the week, accompanied by below-average volume. It’s more than likely that it's consolidating in this area after shaking out the weak hands and profit-takers in the past two weeks. I will not be surprised if it remains here for the next weekly session or two before breaking out leading into the Investor Day in the first week of December.

Daily 13-EMA and 65-EMA Crossover: Potential trend confirmation

We’re getting near the daily EMA-13, around $264-265, for another test and consolidation, in my opinion. This is likely to bring the gap between EMA-13 and 65 closer. The EMA13/65 crossover is what I’m personally waiting for before the Golden Cross (SMA 50/200) that is likely to materialize much later.

It’s in purgatory.

All in all, it’s on the right track to potentially hit my $295 price target in the coming months. However, I believe the $270 resistance wall will be re-tested again leading into Thanksgiving. I did increase my January 2024 OTM call position on November 10, while the rest of the market rallied. It’s best to add McDonald’s options when its implied volatility is low and other high beta names are receiving the attention.

Disclaimer: I have a long position in MCD, with OTM calls expiring on January 19, 2024.

Beat on both top and bottom lines

I needed a full day to digest the superb Q3 earnings results1 on October 30th and to listen to the earnings call to fully form an opinion on its likely trajectory before the end of the year – and also review the sell-side revisions on their price targets.

As I’ve alluded in my previous post regarding its Q3 EPS and revenue, it came darn close to my expectations. The Street’s consensus was $2.99 EPS and $6.55B in revenue; actual earnings per share was $3.17, an increase of 18%, with revenue of $6.69B.

Global Systemwide sales increased 11% for the quarter, with global comparable sales of nearly 9%. Frankly, I'm thoroughly impressed with their execution in the U.K., Germany, and Canada, where they achieved the highest comparable sales.

Earnings call focused on succeeding in a tough macro environment

The theme that repeated throughout the earnings call was a “challenging macro environment” and regulatory headwinds in the midst of outpacing its competitors. For example, Kempczinski noted that he saw down traffic with the income group $45,000 and under but it maintained its leadership in “value perception.”

This particular statement from Kempczinski probably caused the initial sell-off at market open:

…there will certainly be a hit in the short term to franchisee cash flow in California.

However, Kempczinski seems to suggest that the California regulatory landscape regarding wage increase is not optimal but that it’s a short-term, “high pricing” impact on the cash flow on the franchisees. From a market sentiment point of view, I believe the current stock price is forward-looking and has priced this news in.

Where does Big Mac go from here?

I believe fundamental outlook is positive enough to go long from its current price of $262. Nonetheless, it needs to overcome several technical hurdles on the chart to see strong momentum.

1. Here is what I’m seeing short-term:

A strong “Cup with Handle” formation with Handle completion around $262.56 is in process — but with volume hesitancy to break out of this resistance area. It is being rejected multiple times on October 31st and today.

2. The daily view is playing out as “expected:”

My previous post discussed two possible interpretations of the chart pattern formation: one being a steep Cup with Handle, the other being a Bullish Pennant. The latter pattern has played out thanks to the Q3 results but the Handle completion area is still being tested as of November 1st.

3. When it solidly breaks out if this range, the next important tests are the weekly 10-MA and 30-MA at $264.71 and $281.12, respectively:

Analysts’ revisions and upgrades post Q3-ER

For what it’s worth, the earnings provided an insight into McDonald’s business trajectory and sell-side price targets and upgrades are reflecting this sentiment, i.e., average PT of $310.42 with 18.19% upside.

My speculation is that MCD has the legs to surge above $295 in the coming months on the assumption that staples rotation is in play leading into the end of the year.

Further, another important date to keep in mind is McDonald’s Investor Update 2023 on December 6th. This event is likely to give an insight into its 2024 business strategy and some clues as to Q4 2023 results before the January earnings call, keeping the company in the news.

Disclaimer: I have a long position in MCD, with OTM calls expiring on January 19, 2024.

The Ozempic (GLP-1) narrative began taking traction on October 4th after Walmart CEO John Furner stated that he was already seeing an impact from the GLP-1 agonists. He stated:

"We definitely do see a slight change compared to the total population. We do see a slight pullback in overall basket, just less units, slightly less calories."

This comment from Furner percolated fear into the consumer staples and discretionary (XLP), particularly in PEP, KO, WMT, COST, and our friend, McDonald’s. Here’s an illustration of the impact subsequent to his comment:

Through the Walmart’s pharmacy unit, the company used anonymized data to analyze the spending habits of its customers who are taking GLP-1 drugs. I’m not challenging the efficacy of the drug but rather critically questioning its immediate, widespread impact on the junk and fast food market in the short term. What is unclear from Furner’s comment is this: what percentage did GLP-1 users make up in the total sample of this pharmacy data? We simply don’t know.

Still, the Ozempic-related fear percolated throughout the market following October 4th, and the damage was already done, gaining steam on the narrative that Americans are giving up on our most celebrated culture of sugar, fast food, and junk.

Signs of GLP-1 narrative disconnect and the opportunity to profit

Since Furner’s comment, the following circumstantial data points have undercut the argument that Americans are consuming less calories on Ozempic and GLP-1 drugs for now. Again, in my view, it’s a small sample that does not represent the American consumers as a whole due to GLP-1’s high cost, i.e., $1,000-$1,500 per month for injection.

1. Pepsi ER on 10/10/2023. Top and bottom line beats with CEO noting that the impact of Ozempic and Wegovy has been “negligible” so far.

   

2. Coca-Cola Q3 ER on 10/24/2023. Similar to Pepsi, it had a double beat with earnings surprise of 7.25%. Coca-Cola CEO explained how the company outmaneuvered Ozempic for weight loss because Coca-Cola has been offering low-calorie options for years, and GLP-1 drugs are having a minimal impact on the company’s performance.

   

3. Chipotle Q3 ER on 10/26/2023. Chipotle delivered adjusted EPS of $11.36 in Q3 compared to $9.51 in the prior-year quarter. Its EPS came significantly higher than the $10.55 EPS estimate, a double beat expansion. CMG CEO’s commented that it offers a variety of “clean” food that makes it a “good solution” for a growing number of GLP-1 users.

   

4. XLP as of 10/27/2023. XLP, a consumer staples ETF, is demonstrating a similar trend compared to the aforementioned names.

   

5. S&P 500 Heat Map. There’s a possibility that rotation into staples are in play, but I believe another week or two covering strong earnings derived from consumer spending in the fast food sector will solidify this trend leading into the end of the year.

   

McDonald’s Q3 on October 30, 2023 – Before Open

It’s my view that the market is grossly underestimating MCD’s EPS estimates, simultaneously, overestimating the impact of Ozempic. See below for the EPS historical results beginning with Q3 ‘21.

The consensus is $2.99 EPS and $6.55B in revenue and I’d argue that it will likely come in the upper range of the estimates due to Q3 seasonality covering back-to-school, often prompting November to be its best month in the last 20 years: I am just eyeballing here but I’m expecting MCD to post at least $3.15 EPS and the Q3 revenue to be about 1% above the consensus around $6.6B.

Further, I do not put much emphasis on the sell-side analysts. Still, they’ve awfully bullish with a mean PT around $314.30. My rule of thumb has been to apply 5-10% discount to their mean and median PTs:

Some may argue that current price of $257.77 pinning P/E at 23.6x is still too “expensive,” but this is an antiquated metric to look at a business that is succeeding at YoY same store sales growth incorporating digital penetration with their flagship mobile app.

If Chipotle’s Q3 ER is of any guidance, it’s more than likely that McDonald’s will solidly beat this quarter’s expectations, in line with their consistent focus on increasing dividends year after year.

Further, if it can provide an upbeat guidance leading into the end of the year at the Q3 ER call, as well as some commentary on the negligible impact of GLP-1 on their revenue, I believe McDonald’s presents an opportunity for a decent trade that could surge above the illusive $300 resistance and form a base there in the coming months. In the same vein, I’d also make the same argument for XLP.

Disclaimer: I have a long position in MCD, with OTM calls expiring on January 19, 2024.

Current Positioning: NONE

In my previous post on Build-A-Bear Workshop, I disclosed that I held long call positions expiring in January 2024. Since that post, I’ve closed out my position when DA Davidson’s initiation coverage of the company with a $42 PT caused a massive spike in mid-September.

Always sell on the news when it causes an irrational spike.

I’ve learned the hard way that it’s best to sell a small float, small cap position when a new sell-side coverage is able to spike it 15-20% on the news alone. This is less of an issue for mega-caps but these types of spikes on small-caps are more often than not a signal to exit the position. This is because more sophisticated traders with larger positions are able to liquidate their shares – without cannibalizing the share price – at the expense of novice traders who are just entering the trade based on the “positive” review of the company. As the idiom goes, it’s best to add when no one is talking about it.

Paying close attention to Weekly MA 10 and volume

Many years ago when I started out incorporating technical analysis into my trading practice, I made the grave mistake of relying solely on the daily charts and their 50 and 200 days moving averages (MA). What I didn’t know then was that large institutions relied on 10 weekly MAs for their buy point, and vice versa, a harbinger for exiting their position.

Case in point. BBW is supported by weekly 10 MA at the moment at $27. Make no mistake because it’s the large institutions holding this precarious spot. If it settles at any point below WMA-10 with increasing volume, this is likely a decent time to lighten up the position. More often than not, the large holders are distributing around this area and it does not take much on their end to move this small float.

I’m fundamentally bullish on this company but I cannot let the technical guard down just because I love their products and the company. A novice mistake.

The illusive McDonald’s LEAPS trade is NOT for the weak of heart.

I’m starting the McDonald’s post with “v10” because I’m no stranger to trading MCD LEAPS for years. I particularly enjoy the trade because 1) the earnings and sales YoY are “somewhat” predictable; 2) technical patterns adhere to the basic rules; and 3) the options’ premium move aggressively due to the underlying institutional block orders. I’d argue that the last point is what makes the trade special; similarly, it’s the double-edge sword that can make an old man cry. Proceed if you’re an adrenaline junkie like myself.

“The Golden Arch” Patterns

As ridiculous as it may sound, McDonald’s chart has consistently shown the 'Golden Arch' pattern before its advance – but it also serves as a testament to its tendency to pull back ferociously. It would be remiss not to recognize how significant the pullback has been for the Dow Jones Industrial Average as a whole, and specifically for McDonald’s, this past month. (I’ll discuss the fundamental news events that caused the pullback in another post.)

A Blue Chip that typically corrects 10%+ at a time

This week, for example, flushed on various news I’ll discuss in another post. However, McDonald’s historically has a tendency to pull back between 10-15% on corrections. Aside from the Covid crash of March ‘20, it is currently within its 'normal' standard of distribution, albeit carrying its usual velocity, which can make old men cry if solely focused on 1-minute candles. I'd argue here that the weekly trendline is intact, and it's likely to bounce off of these levels unless the 10-year yield decides to march on. As of this writing, it’s at 4.762%.

The dividend bucket in turmoil

I tend to move towards consumer defensive names, particularly the ones that pay dividends, on higher rates and higher WTI crude prices. This approach has served me well between 2009 through 2013 post Great Financial Crisis, yet I can’t ignore the real rates. Here is a look the past 6 months against S&P 500 and Nasdaq:

McRib call options: They’re just as divisive as the sandwich

This is where the high and low of the trade is, in my opinion. Out-of-the-money (OTM) calls tend to be quite cheap compared to the in-the-money (ITM) and at-the-money (ATM) garden variety, but the odd lot is the high Open Interest on the OTM strike options.

This, to me, signifies that speculators are making this trade on gamma, propelled by the underlying block orders from institutions amidst low Implied Volatility. In other words, the premiums on OTM calls will likely exhibit outsized, disproportionate returns if timed correctly. Conversely, premiums could lose value just as quickly on an underlying pullback. Another thing to note is the wide discrepancies in premiums between various strikes; for instance, if and when the initial OTM contracts turn in-the-money, it's likely to be a rewarding trade.

Therefore, in my opinion, this trade should be executed in conjunction with consideration of corporate events, fundamental and technical analysis, and proper options configuration.

As for the fundamentals and sentiment of the company, I’ll discuss in another post. There’s a lot to unpack and dissect covering the past eight weeks – and it ain’t pretty.

Disclaimer: I have a long position in MCD, with OTM calls expiring on January 19, 2024.