All-time highs, hefty percentage gains — what’s not to like about the market, or maybe more fittingly these days, that market euphemism FANG? Maybe nothing, but if you want to take a “bite” out of the market, it might be a very good time to look elsewhere. Let me explain.
When you think of large-capitalization tech stocks and the market for that matter, it’s hard to not think of FANG. FANG of course is the acronym behind Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), i.e. the company formerly known as Google.
In fact, FANG has become so commonplace, it even spawned FAANG so as to not leave out the world’s largest publicly traded company and technology giant Apple Inc. (NASDAQ:AAPL).
No doubt investor interest in FAANG has been more than well-deserved. While each of those names has had its hiccups on and off the price chart over the last few years, the group has also scorched an incredible run in the broader market. And in 2017, there almost seems to be no end in sight for that bullish trend.
Compared to the S&P 500 and its gain of around 10%, FAANG are up 23% to 39% with GOOGL being the slug at just slightly more than twice the market’s gain and FB being the most liked by investors. But in playing the devil’s advocate role, and because FAANG has been so hot, could it be the right time to acknowledge a rotation within large-cap technology stocks is inevitable? I like to think so.
Swallowing that logic, it’s time to take a “bite” out of the market with Baidu Inc (ADR) (NASDAQ:BIDU), Illumina, Inc. (NASDAQ:ILMN), Tesla Inc (NASDAQ:TSLA) and Electronic Arts Inc. (NASDAQ:EA) — four large-cap tech names I’ll coin “BITE.”
So, let’s take a look at BIDU, ILMN, TSLA and EA individually, both off and on the price chart, as well as provide an options strategy to fit the situation.
Tech Stocks to BITE: Baidu (BIDU)
Chinese search and technology giant Baidu dominates the search market overseas and much like its U.S. counterpart Alphabet, is on a mission to expand its reach by venturing aggressively into new markets such as artificial intelligence, autonomous automobiles and broad-based internet services.
After a regulatory rough patch over the last couple years tied to riskier advertising practices, business prospects are definitely looking up for Baidu, with profits rebounding and yearly sales forecasted to grow by about 21%.
Gains in 2017 for BIDU stock of about 16% might partially reflect the company’s opportunities. But it’s our opinion with a matching 16 buys and holds from analysts, there’s some room for upgrades. What’s more, with a weekly price chart offering a second attempt breakout entry from a massive two-year long triangular holding pattern — BIDU is showing more teeth than FAANG for bulls.
Reviewing the Baidu options board, a long Sep $200/$210 call spread is attractive. Priced for $2.20 with BIDU at $190 is well-positioned on both a time and trajectory basis to take advantage of potential follow-through on the price chart while enjoying the benefits of limited and reduced risk.
Tech Stocks to BITE: Illumina (ILMN)
Next up on our list of large-cap tech stocks in a position to take a bigger bite out of the market than FAANG names is Illumina.
The biotechnology outfit is a world leader in genomic sequencing. And after a couple years of relative weakness, off the price chart the company’s new NovaSeq platform, solid recurring revenue streams and a dominating market moat which Illumina continues to build bode well for investors.
On the price chart, following a 50% correction which marked a failed breakdown below key weekly support, conditions are also looking up for ILMN.
The weekly view suggests shares of ILMN are oversold as it consolidates laterally around the 50% retracement level. A breakout would have the technical impact of putting Illumina well into the right side of a large base spanning two years in length from its all-time-highs.
Reviewing ILMN’s options board, the Sep $195/$210 bull call spread looks interesting. With shares at $172.33, the vertical is priced for $1.50 mid-market.
As with BIDU, a rally is required to profit with this ILMN spread. However, the combination of strike placement and low-cost, high-return potential in relation to a breakout above the 62% resistance line looks like the right type of building blocks for a strong investment in tech stocks.
Tech Stocks to BITE: Tesla (TSLA)
Tesla is our third component stock to take a stronger bite out of than those FAANG stocks.
I’m pretty confident readers need no introduction to the EV or electric vehicle upstart. And I’m equally certain you have an opinion on the company, as it has been one of the markets most talked about and visible battleground stocks the last couple years with its cadre of raging bulls and grizzly bears.
That being said, I have nothing to add except to say I’m not in the TSLA cult. I am however, a fan of Elon Musk and the positive impact Tesla has made on the automotive world and in turn, on our global environment.
I’m also currently a fan of TSLA stock on the price chart. A healthy corrective move of 21% has tested the 38% retracement level from late 2016’s pre-turbo price rally and held above Tesla’s massive breakout from an inverse head and shoulders pattern.
Reviewing the options board on TSLA stock, one way to avoid being a crash test dummy is with a modified bullish fence strategy. With shares near $317, selling the Sep $310/$285 put spread combined with buying the Sep $350/$375 call vertical is priced for around a $6 credit.
With this combination if shares of Tesla are trading from $310 to $350 at expiration, the investor will capture the full credit. Above $350 and the position is able to ride the call spread for better than free and potentially realize a max payout of $26.
The sold Tesla put spread does put the trader at risk, but a loss is limited to about 8% of TSLA stock and positioned in anticipation of technical support ultimately holding.
Tech Stocks to BITE: Electronic Arts (EA)
The last name to take a bite out of the market with is Electronic Arts. The gaming industry is huge and getting larger by the day. In fact, industry observers suggest 63% of households have at least one gamer in residence that’s glued to their Microsoft Corporation (NASDAQ:MSFT) Xbox, Sony Corp (ADR) (NYSE:SNE) PlayStation, tablet, PC or other platform for three or more hours per week.
What’s more, the demographics are expanding favorably with more diverse titles, digital distribution and areas like eSports reaching well beyond the basement of the geeky teenager next door. And EA happens to be one of the 800 lb. gorillas positioned to continue enjoying this secular growth trend in entertainment.
On the price chart, optimism surrounding the industry and EA stock are easy enough to appreciate. Shares of Electronic Arts have doubled in the last year and one-half and since 2014 have rocketed by around 300%. But despite the stellar gains, this is one trend that also looks good to continue.
Currently EA stock is consolidating in a tight, flat base of around 10% in depth for the last couple months. The price action is healthy looking and looks poised for fresh highs following a corrective base reset back in early 2016 and more recent, a cup-shaped base breakout straddling late last year into 2017.
Checking Electronic Arts options and with shares at $109, the Sep $115/$120 bull call spread for $1.35 or better is reasonable. This particular vertical play allows bulls to capture 221%, or $3.65 if EA stock can establish a modest full-court press of just 3.5% above the current base high.
The required move to reach $120 is fairly unspectacular and for a cost of just more than 1% of owning shares of Electronic Arts, this strategy also guards itself from being a game-over situation should the bears somehow manage a counter-attack.
Investment accounts under Christopher Tyler’s management currently own positions in Baidu stock and its options, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
