That market has loved Himax Technologies (NSDQ: HIMX) as one of the purest plays on virtual reality for about four years now, but it’s a very on-again, off-again affair. Most recently, it’s been Morgan Stanley analyst Charlie Chan who has been the deciding factor on if we love the company or not.

Chan was writing laudatory research notes barely a month ago, praising Himax as the best play on the growing virtual reality/augmented reality (VR/AR) market. The company supplies the key hardware components that makes VR/AR work and, as a key supplier to some of the biggest names in the field, so he believed the stock could go nowhere but up. He also talked up the fact that Himax announced a major breakthrough in 3D depth sensing technology. Then came last week’s earnings report.

Himax’s fourth quarter was something of a mixed bag, hitting its quarterly revenue forecast yet missing on earnings because of an inventory write-down. Sales of large-sized panel drivers, used mainly for high-end televisions, fell 6% compared to the prior quarter, while small and medium-sized panel drivers were essentially flat. Non-driver sales, which includes VR/AR components, actually shot up by 22.9% in what is a very good sign of growing VR/AR demand. For the full year, revenue was up 16.1%.

Despite hitting its revenue guidance, earnings declined more than expected because of an inventory write-down. Without that write-down, EPS would have come in at 8.6 cents and in range of guidance, but actually came in at 2.6 cents. Gross margin in the quarter also fell 6.5% sequentially to 19.1%.

The earnings miss clearly rattled Chan, who also pointed out that Vuzix, a leading vendor of AR smart glasses and uses a different component supplier, won the Consumer Electronics Show’s Innovation awards. He thinks that might not bode well for Himax’s business, tempting other AR/VR makers to switch technologies. He also thinks first quarter sales will also be weaker than expected, but the first quarter is seasonally weak for Himax anyway. What a difference a month makes in Chan’s outlook.

I don’t see any reason to think other AR/VR makers will switch away from Himax’s components, mostly because of high switching costs. Making that sort of change would send VR/AR products back to the drawing board, even as Himax’s technology is steadily evolving and improving. Making a switch seems like a high-risk move without any guaranteed upside.

I think most other investors agree with me. In another development that might have rattled Chan’s nerves, Himax also issued weak first quarter guidance. It predicts revenue will fall between 18% and 25%, which isn’t a huge surprise since it is the company’s weakest quarter on average. It expects gross margin to come in between 23% and 24%, with EPS between 0.5 cents and 2 cents.

Despite that weak guidance, the shares have shot up more than 30% on much stronger than average volume. I’m obviously not the only one that thinks Chan is being too pessimistic. As a leading supplier with nearly $180 million of cash on the books, I don’t see Himax losing its top position in the VR/AR market; this is just the usual ups-and-downs of a developing technology.

Himax Technologies is a buy up to $15.

– Benjamin Shepherd

HMO Woes Serve up Option Opportunities

By Joe Duarte on February 22, 2017

The week ending on February 17 wrecked the health insurers. Aetna’s CEO started the mayhem when he told an interviewer that Obamacare was in a “death spiral.” But that was only the beginning; the Cigna-Anthem merger is all but over, Molina Healthcare missed its earnings badly, and United Healthcare is being sued for Medicare fraud by the U.S. Justice Department. However, their bad luck is an opportunity for our options portfolio to deliver big gains for you. 

Buy United Healthcare June 16, 2017 165 Call up to $5

I recommended the purchase of United Healthcare June 16, 2017 165 Call (UNH_170616100C16500) up to $5 on February 17. United is the largest health insurer in the U.S., and the U.S. joined a whistleblower lawsuit that alleges that UNH overbilled Medicare by making data related to very ill patients worse than it actually was, thus generating higher payments to the insurer. According to the law firm representing the plaintiff who is an ex-UNH executive, there is e-mail and other evidence that suggest unlawful behavior on the part of the insurer. The stock also fell somewhat in sympathy with Molina Healthcare (NYSE: MOH), as the latter missed its Q4 earnings on February 16 and announced that it is likely to leave the Affordable Healthcare Act (ACA) marketplace (I have a play on Molina described below).  

If this lawsuit plays out as they often do, it will take a long time to resolve, and there is likely to be some sort of settlement if UNH is either proven guilty or decides that it doesn’t want to deal with the hassle of the lawsuit. Meanwhile, business will go on and UNH will continue to print money. This makes the risk/reward ratio of this option trade worthwhile for now. I also don’t believe UNH is at risk of big losses from the ACA at this point, since it has already begun to remove its association with the program. 

This is not a trade without risk. It’s  uncertain why the U.S. government joined the law suit now, since it’s been sealed since 2011. Thus, maybe something has recently come to light that would make Justice go for the throat and make a big dent in UNH. Yet, the odds of that are unknown. So for now, this seems like a good opportunity to leverage UNH’s dominant position in health insurance.

Buy United Healthcare June 16, 2017 165 Call (UNH_170616100C16500) up to $5.

I have a position in UNH.

Molina Gets Crushed on Awful ACA Related Results

I am changing the Molina Healthcare June 2017 Straddle to “Hold” from “Buy to Open”, both on the Call and the Put option legs.

Shares of Molina Healthcare (NYSE: MOH), the country’s largest provider of Medicaid managed care health plans, cratered after the company missed its earnings and revenues for the 4^th quarter on February 16 after the market closed. The company, which also reduced its 2017 guidance by 43 percent below analyst estimates, associated the miss and the poor outlook with Obamacare (ACA). The company’s CEO, J. Tony Molina, described the results as illustrative of the “challenges” in the Obamacare marketplace due to government charges on insurance companies participating having been larger than expected. The company lost $91 million in the quarter ($1.64 per share) versus a $30 million (52 cent per share) profit the year before. Analysts were expecting a profit of 75 cents. 

This puts our Molina June 55 Straddle in play. The put option leg shot up as expected and the call option fell, also as expended. The straddle is underwater, but still has over 110 days until expiration, which gives us plenty of time to let the trade play out.

I designed this trade fully expecting this scenario, given Molina’s over-dependence on the low-margin Medicaid business and the poorly financed ACA dynamic. I think things will get worse for this company of the next few weeks. If I’m right, I expect the call to continue to fall in value over the next few days and perhaps weeks as the put option rises. 

The loss proved prophetic as earlier in the day, Aetna CEO Mark Bertolini described Obamacare was in a “death spiral,” soon after Humana announced it would be leaving the system altogether in 2018.

Molina Healthcare June 2017 Straddle

HOLD Molina Healthcare June 16 55 Call Option (MOH_06162017C55) up to $8. Bought 12/7/16 at $8 – 2/17/17 closing price $1.98

HOLD Molina Healthcare June 16 55 Put Option (MOH_06162017P55) up to $8. Bought 12/7/16 at $7.80 – 2/10/17 closing price $8.45

Initial Straddle Value $15.80.  2/7/17 closing value $10.43.  

New This Week

Buy United Healthcare June 16, 2017 165 Call (UNH_170616100C16500) up to $5.

HOLD Molina Healthcare June 16 55 Call Option (MOH_06162017C55) up to $8. Bought 12/7/16 at $8 – 2/17/17 closing price $1.98

HOLD Molina Healthcare June 16 55 Put Option (MOH_06162017P55) up to $8. Bought 12/7/16 at $7.80 – 2/10/17 closing price $8.45

Initial Straddle Value $15.80.  2/7/17 closing value $10.43.  

– Joe Duarte