An Indirect Bet on Apple and another Option Play

It was broadly positive for global stock markets last week, with the Dow Jones up 0.60%, the S&P 500 gaining 0.43% and the NASDAQ jumping 1.14%. The MCSI Emerging Markets Index also rose 1.15%.

Big gainers in our Bull Market Alert portfolio included TJX Companies (TJX), which leaped 3.56%, and Drew Industries Incorporated (DW), which gained 1.98%. Also, the MCSI Emerging Markets Index (EEM) jumped 1.15% and Healthcare Services Group, Inc. (HCSG) recovered 1.06%.

You were stopped out of your position in Dycom Industries, Inc. (DY) for a 2.82% gain.

Avista Corporation (AVA), Allete, Inc. (ALE) and NorthWestern Corporation (NWE) moved to a HOLD.

With TJX Companies’ (TJX) stock price rising on accelerating volume, this week I am recommending that you buy the TJX October $82.50 calls (TJX161021C00082500), which last traded at $2.77 and expire on Oct. 21.

This week’s new Bull Market Alert recommendation, Cirrus Logic, Inc. (CRUS), is a semiconductor company that is best known for manufacturing audio-related products for smartphones, tablets, digital headsets, wearables and portable media players.

Cirrus’ stock has been on a tear in 2016, with shares soaring more than 70% this year.

Here’s why I expect Cirrus shares to continue their recent climb.

First, Cirrus traditionally has been viewed as an indirect bet on Apple (AAPL). After all, Cirrus is a supplier of audio codec chips to Apple, and the computer giant still accounts for 68% of its revenue. That also means that the expected launch of the iPhone 7 in September is likely to boost the short-term performance of the stock.

At the same time, Cirrus is working hard to reduce its dependence on Apple. Cirrus codecs are found in some of the latest versions of the Samsung Galaxy S7 and Samsung already accounts for 12% of its revenue. Management expects to grow its market share within the Android ecosystem as Android phones adopt iPhone-style premium audio features.

Second, Cirrus’ recent earnings confirm a strongly bullish outlook for the stock. Cirrus shares soared more than 19% after the company reported fiscal first-quarter earnings of 44 cents per share on revenue of $259.4 million, trouncing analysts’ projections for 25 cents per share on revenue of $236.4 million. Cirrus also recently reaffirmed its strong business outlook by upping revenue guidance for fiscal Q2 to between $380 million and $410 million.

Third, virtually overnight, Cirrus has become one of the most popular stocks among the top-performing, small-cap-growth investment strategies I track. Over the past week, it popped up in nine of these strategies. That means a whole slew of investment managers are betting big on Cirrus to continue to gallop ahead.

So buy Cirrus Logic, Inc. (CRUS) at market today, and place your stop at $41.00. I am holding off on recommending options here until the stock settles a bit and the option prices become a bit cheaper.

The company now has $4.2 billion and no long-term debt on its balance sheet.

My short-term current target price for Cirrus stands at $56.00, about 11% above Friday’s closing price.

Portfolio Update

Avista Corporation (AVA) dipped 2.37% after missing earnings estimates last week. Avista reported earnings on Aug. 3 with earnings per share (EPS) coming in at $0.43 vs. an analysts’ consensus estimate of $0.44. This was an increase from $0.40 for the same period last year. Revenue was $318.8 million and beat the $316.2 million estimate. This was down from last year’s $337.3 million. AVA issued guidance looking for 2016 full-year earnings to fall in the range of $1.96 to $2.16 EPS. AVA moved to a HOLD last Friday.

Allete, Inc. (ALE) fell 3.85%. ALE reported earnings of $0.50 EPS vs. an estimate of $0.51. Revenue came in at $314.8 million, falling 2.6% compared to the same quarter last year. ALE moved to a HOLD.

Drew Industries Incorporated (DW) gained 1.98%. As the third position to report earnings in the Bull Market Alert last week, DW beat estimates and hit a new 52-week high. DW reported earnings of $1.51 per share. This beat the analysts’ consensus estimate of $1.34 per share and reflected a jump from last year’s $0.85 per share for the same quarter. Revenue came in at $440.8 million, also beating the estimate of $407.7 million, and reflected a year-over-year gain from the second-quarter 2015 figure of $362.1 million. DW is a BUY.

Spire, Inc. (SR) lost 1.69% last week. In more earnings news, SR reported earnings on Aug. 3. Earnings per share were $0.33 on revenue of $249.3 million. The consensus estimates came in at $0.27 per share on revenue of $277.8 million. Although SR beat on EPS, the revenue miss reflected negatively on stock prices. SR also issued guidance for the fiscal year 2016 earnings of $3.34 to $3.44 per share. SR is a BUY.

ABM Industries Incorporated (ABM) gained 0.13% for its first week in the portfolio. The Street lists ABM as a “Buy,” based upon positive revenue growth, a solid financial position and reasonable debt levels. ABM’s debt-to-equity ratio falls below industry averages, reflecting well on management and its ability to successfully control the company’s finances and debt levels. ABM is a BUY.

Sincerely,

Nicholas A. Vardy