Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/2/2016

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Oil Rebound Crushed

by Jim Brown

Click here to email Jim Brown

Positive earnings from Google and others were overshadowed by economic concerns and a plunge in the price of oil of more than 12% over the last two days.

Market Statistics

I have been telling readers this would happen once oil prices got past the Russian headline spam from last week. The multiple vague comments about production cuts and meetings with OPEC spiked crude to $34.40 last week. Over the weekend, repeated denials of any potential deal or even any talks killed that headline spike. Russia tried it again this week when Russia's energy minister and Venezuela's oil minister met to "discuss production cuts" but the headlines produced by the meeting failed to lift oil prices. They tried to create a photo op and headline but it had no impact. That suggests further headlines will have no impact and fade quickly.

The American Petroleum Institute (API) said after the close that U.S. crude inventories rose +3.8 million barrels to a new record high. Gasoline inventories rose 6.6 million barrels. This pushed crude prices even lower in afterhours trading to $29.40. The EIA inventories due out on Wednesday morning are generally accepted as more accurate and they showed an 8.4 million barrel build last week. Crude prices should remain under pressure for the next 8 weeks until the normal inventory build cycle ends and refiners begin to produce summer blend fuels ahead of the driving season.

Investors see oil prices as a proxy for the health of the global economy. If oil demand is not rising, prices fall and that suggests the global economy is weak. In the current environment, demand growth has slowed at the same time production growth has increased. Dramatically lower oil prices are forcing inflation down around the world and driving central bankers crazy. Everybody just needs to take a step back and look at the historical inventory patterns and realize that prices will rise somewhat when inventories begin to decline in April.


The economic reports did not create any confidence in the market. The ISM-NY fell to a four-month low at 54.6, down from 62.0 in December. The six-month outlook component fell from 70.7 to 63.3 and the lowest reading in six months. The purchase quantity component declined from 50.0 into contraction territory at 46.4. Current revenues declined from 60.0 to 45.8. The only component to gain materially was employment jumping from 42.9 to 56.9.

The last update from the Empire State Manufacturing Survey on January 15th saw the headline number dip to -19.4 and the lowest since the financial crisis. With the ISM-NY now confirming that decline in New York business activity the outlook is weakening. However, companies would not be adding employees if they were really concerned.

Auto sales for January came in at an annualized rate of 17.6 million and higher than expected. The December rate was 17.3 million. Considering the blizzard in the Northeast those were very strong numbers for January sales. The blizzard cost dealers a week of sales. Auto sales were flat at 7.4 million but light trucks and SUVs rose from 9.9 to a pace of 10.1 million. These numbers are seasonally adjusted so the real impact may not be seen for several months. Low gasoline prices are really helping the auto sector and people are buying larger vehicles, which helps profitability for the manufacturers.

We will get the first payroll report for January on Wednesday and expectations have declined to 195,000 from 210,000 because of rising weekly jobless claims and the seasonal declines in January. Estimates for the Nonfarm payroll number for Friday have declined from 220,000 to 190,000.

The ISM Nonmanufacturing Index on Wednesday declined slightly to 55.1 after the ISM Manufacturing report on Monday came in at 48.2 and the fourth consecutive month in contraction.

The closer we get to Friday the more likely we will see a decline in the Chinese markets ahead of their weeklong holiday next week. Investors would have to have a cast iron stomach to hold long positions over a weeklong holiday.


Alphabet (Google) posted strong earnings on Monday and shares spiked to $810 overnight and again early this morning, for a gain of $40. That gain faded as the day progressed and GOOGL closed today with only 10 points remaining of that initial $40. That was not enough to rescue the Nasdaq from a -103 point loss.


Earnings this morning did not help the market. Exxon (XOM) reported a 58% decline in profits and said it was slashing capex spending by 25%. Exxon reported earnings of 67 cents on revenue of $59.81 billion. That beat estimates for 63 cents but was way down from the $1.32 and $87.28 billion in the year ago quarter. Full year profits declined from $32.5 billion in 2014 to $16.2 billion in 2015. Production rose +3.2% with liquids up +11% to 2.33 mbpd. Exxon reduced capex -19% in 2015 to $31.1 billion and said they would cut another 25% to $23.2 billion in 2016. Exxon bought back 48 million shares of stock at a cost of $4 billion and paid $15.1 billion in dividends. Shares declined -$1.70 on the news.


Exxon's -$1.70 decline did not have an appreciable impact on the Dow but fellow component Chevron (CVX) fell more than $4 on the drop in oil and Exxon earnings news. Investors are afraid that Chevron will not be able to continue its 5.3% dividend if oil prices continue lower. The Chevron decline cost the Dow about 30 points.


BP Plc (BP) reported earnings that fell -91% to $196 million, down from $2.2 billion. The oil giant announced 7,000 planned layoffs. The CEO tried to assure investors that the dividend was secure as a result of the planned cuts in employment and capital expenditures. Shares fell -8.5% so apparently it did not work.


Royal Caribbean Cruises (RCL) reported earnings of 94 cents that beat estimates for 92 cents. Revenue of $1.9 billion missed estimates for $1.95 billion. The company provided weak guidance for Q1 of 30 cents compared to estimates for 46 cents. Full year forecasts of $5.90-$6.10 missed analyst estimates for $6.25. Despite the falling fuel costs, the cruise lines are now dealing with the Zika virus and cancellations for southern cruises. They also expect revenues to suffer a -14% decline from the strong dollar. Shares of RCL fell -15% and were the largest decliner on the S&P-500. Carnival (CCL) shares were down -8%.


UPS (UPS) reported adjusted earnings of $1.57 that beat estimates of $1.41. Revenue of $16.05 billion missed estimates for $16.27 billion. UPS delivered 1.3 billion packages in Q4, a 2% increase over 2014. They hired 95,000 seasonal workers but because of increased automation, they were able to delay some of the hiring until it was needed. The company guided to full year earnings of $5.70-$5.90 and analysts were expecting $5.72. Shares closed with a minor gain and $1.50 off their highs.


After the bell, Gilead Sciences (GILD) reported earnings of $3.32 compared to estimates for $3.00. Revenue of $8.51 billion easily beat estimates for $8.14 billion. Hep-C revenue of $4.9 billion also beat estimates for $4.45 billion. The company announced a 43-cent dividend for Q1 and increased it by 4 cents to 47 cents for Q2. They also announced another $12 billion stock buyback program in addition to the existing $15 billion authorization with $8 billion remaining to be spent. With a market cap of $119 billion, they are going to buy back roughly 20% of their stock. Gilead plans to spend $5 billion over the next three months in an accelerated buyback given the low price of their stock. Shares rose $1 in afterhours.

It is puzzling to me why Gilead shares are not moving higher. Record earnings, record cash, dividend increases and monster stock buybacks are not helping. The only excuse I can come up with is the worry over a new president clamping down on high drug prices. Gilead would be a prime target with their $90,000 Hep-C drugs.


Yahoo (YHOO) reported earnings of 13 cents that matched estimates. Revenue of $1.27 billion beat estimates for $1.19 billion. However, the company remains under pressure from shareholders to do something to improve value. The company said it was considering a reverse spin off to separate the core business from the Alibaba holdings. They are going to lay off 15% of the work force and close five offices in an effort to cut $400 million in expenses by the end of 2016. They are also considering selling off some noncore assets in a move they believe would generate $1 billion or more in cash. Shares declined slightly in afterhours.


Chipotle Mexican Grill (CMG) reported earnings of $2.17 compared to estimates for $1.85. Revenue of $997.5 million missed estimates for $1.003 billion. The decline in sales from the E.coli outbreak has been painful. Same store sales declined -14.6% and net income fell -44% to $67.9 million. The CDC ended its E.coli investigation on Monday but now the company has a bigger problem.

The U.S. Attorney's office in California served them a subpoena that broadened the scope of a previously announced criminal investigation. The original investigation focused on only one store in Simi Valley, California. The expanded investigation is now national in scope. Chipotle said it was cooperating with the investigation. Shares declined -$35 in afterhours.


Apple researcher, 9to5 Mac, said Apple could be planning on releasing a new iPhone at a March 15th event. They also expect a new iPad and new Apple Watch band options. The firm expects an upgraded 4-inch iPhone 5SE and iPad Air 3. Apple needs the smaller, cheaper iPhone to compete with the cheaper Android models in China and India.


Dow Jones is reporting that Amazon is planning on opening 300-400 brick and mortar bookstores. This came from mall operator General Growth Properties CEO Sandeep Mathrani on an earnings call with analysts. Amazon opened its first store in Seattle in November calling it a "physical extension of Amazon.com." The books and products sold at the stores are supposed to be the same price as buying online at Amazon.com. The key here is that people like to browse books and you can bet that there will be plenty of Kindles, Fire tablets and other Amazon electronics and products other than books.


Markets

The major indexes gave back nearly all their gains from the Friday market spike and the only real culprit was the drop in oil prices. There is murmuring about the health of the financial sector both here and abroad and the talk of a global recession or deflationary cycle will not go away. Oil prices are contributing to that problem by making significant impact to foreign economies.

In Russia 25% of their GDP comes from the energy sector. In Saudi Arabia 90% of their revenue comes from oil. Venezuela is circling the drain and would already be bankrupt if it were not for the daily influx of petrodollars.

In Europe, the banks are crashing because of their exposure to energy and mining plus the negative interest rates charged by the ECB. One analyst claimed today that several of the major European banks could be going to zero because of their exposure to commodity businesses. For example, Glencore, a major European mining company has more than $20 billion in debt outstanding and much of it was syndicated to European banks. There are rumors that Glencore could file bankruptcy.



In the U.S. Goldman Sachs (GS) declined -$8 today to knock about 56 points off the Dow. The bank has exposure to commodities and to energy loans but they are far from life threatening. Goldman closed at a two-year low.


According to some analysts, the problem is interbank liabilities and derivatives. How much would the collapse of Deutsche Bank (DB), Credit Suisse (CS) or the Royal Bank of Scotland (RBS), just to mention a few, impact the rest of the banking system in Europe. Is there a Lehman moment somewhere in the near future? How much would a European banking crisis impact the USA? Nobody has the answers to these questions and the indecision is causing market unrest.

In the U.S., the yield on the ten-year treasury closed at 1.84% and some analysts believe it is going to 1.5% later this year. That was the low back in 2012. Everybody appears to be rushing to the safety of treasuries in a period of uncertainty.


Earnings for Q4 are down -5.8% as of Friday with revenues down -3.5%. If the quarter finishes as expected this will be the third consecutive quarter of earnings declines and that rarely happens outside a recession. The last time was in 2009.

This is weighing on the markets along with falling commodity prices. The Baltic Dry Index hit another record low today and that means very few companies are shipping anything from country to country.


The U.S. GDP came in at a miniscule 0.7% growth in Q4 and the manufacturing sector is in a recession. There are lots of problems worrying the market and yet analysts keep projecting higher S&P prices by the end of 2016.

Where is that rally going to start? The S&P recoiled violently from resistance at 1,950 on Monday. The high was 1,947 and there was an immediate 10-point drop when that was reached. The index declined to support at 1,900 today and back into correction territory.

Quite a few analysts believe we are going to retest the lows before we begin a real rally into midyear. They are mixed on whether that means the 1,867 lows from August or the 1,812 lows from January. At this point, the S&P is only 36 points above the August lows so that would be the initial target. What happens then is the $64 question.

Initial support is now 1,878 and a break of that level could see the selling accelerate.


The Dow touched resistance at 16,500 on Monday and the selling there was instant as well with a -70 point drop from that level. The Dow has decent support at 16,025, 15,855 and 15,700. Fortunately, most of the Dow stocks have already reported earnings so there will be little headline risk. However, the decline in the financials and energy stocks are sharp enough that we do not need any additional risk to push it lower.



The tech sector is still being dragged lower by the biotechs. The Biotech Index ($BTK) declined another -4.3% today to 2,775. There is potential for a pause at 2,700 but the real target is 2,300 because of the political attacks on drug prices. The BTK is now down -38% from its highs and deeply into a bear market.


The biotechs are dragging the Nasdaq and the Russell into a bear market with them. The Nasdaq Composite is down -13.5% from its highs and could easily retest the August low at 4,292 without any significant event to rescue it from disaster. The major Nasdaq stocks have all reported earnings and are in decline.



The Russell 2000 gave back -2.3% today to close at 1,009 with support at 1,000. With biotechs and energy stocks dragging the index lower the odds are good it will move below that support and possibly retest the January low at 954 if we have another $25 print on oil prices. With crude at $29.45 as I type this that is a very good possibility we will see $25.


The last problem weighing on the market is the emergence of the Zika virus. The virus was first discovered in 1947 and is reported to cause brain damage in unborn infants if the mother contracts the virus while she is pregnant. It is thought to cause Microcephaly where the baby is born with a shrunken head and much smaller brain. More than 4,000 cases of Microcephaly have been reported in Brazil and blamed on the virus. This is causing airline passengers to cancel trips. Summer vacations to southern states and the Caribbean are already being cancelled as well as cruises in southern waters. The U.S. economy is already weak enough and it does not need another crisis but we do not get to chose when it is convenient for a crisis to appear.


S&P futures are down -10 as I write this. If nothing changes, Wednesday could be another down day. Asian indexes opened significantly lower and that is probably one of the factors in our futures decline.


Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Option Plays

Playing in Traffic

by Jim Brown

Click here to email Jim Brown

Editors Note:

My parents taught me that playing in traffic was dangerous. When I grew up I thought I knew better.

When I started my trading career I thought I was nimble enough to dodge all the bad news and unexpected market events. I quickly learned that playing in the market traffic was definitely dangerous to my financial health.

The Dow declined -295 and the Nasdaq -103 on basically no news. Oil prices were crashing and they are still falling overnight. Analysts were scratching their heads trying to find one answer to the market decline. Unfortunately, markets sometimes decline on their own without some clear reason.

With banks going to zero in Europe, energy and mining companies nearing bankruptcy, economic reports hitting post crisis lows and a the new Zika virus causing panic in the south, it is probably in our best interest not to play in this market traffic.

I am not recommending any new plays today.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays




In Play Updates and Reviews

No Complaints

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the big market drop we did not lose any positions to stop losses and one of our new put positions was triggered.

You cannot complain about a day where the market falls -295 points on the Dow and -103 on the Nasdaq and none of our plays were stopped out. Our long stocks suffered some losses but we are still in play.

The Alibaba put was triggered and the Ambarella put position is close to being triggered. The S&P futures are negative -10 as I write this and the Asian markets are down hard. Wednesday could be a difficult open.



Current Portfolio




Current Position Changes


BABA - Alibaba

The Alibaba put was triggered today at $64.85.


AMBA - Ambarella

The Ambarella put remains unopened.


AOS - AO SMith

The AO Smith call remains unopened.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



Original Call Recommendations (Alpha by Symbol)



AOS - AO Smith - Company Description

Comments:

There was a minor decline after two weeks of gains. Considering the Dow was down -295 I am pleased with the relative strength.

Original Trade Description: February 1st

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 29th market crash and have been moving steadily higher. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade over today's intraday high.

With an AOS trade at $70.45

Buy April $75 call, currently $3.30. Stop loss $64.85.


KR - Kroger - Company Description

Comments:

Kroger continued its winning trend with another gain today in a bad market. No change in the position.

Original Trade Description: January 28th

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Position 1/29/16:

Long April $40 call, entry $1.05. No stop loss because of the cheap option.


LULU - LuluLemon

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description

Comments:

Excellent relative strength with a $1.19 gain in a bad market. Michael Kors (KORS) rallied +$10 after earnings and lifted the retail sector.

Original Trade Description: January 22nd

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

Position 1/26/16:

Long March $60 calls @ $2.90, see portfolio graphic for stop loss.




STZ - Constellation Brands - Company Description

Comments:

Up $2, down $2 but today was market related.

Original Trade Description: January 14, 2016:

STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance. Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.

STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.

Position 1/19/16:
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.




THO - Thor Industries - Company Description

Comments:

Thor gave back $2 to erase the Friday/Monday gains. I jinxed it yesterday when I said it had no volatility.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.


Original Put Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Description

Comments:

The Ambarella trade remains unopened with an entry trigger at $35.75. Shares declined -1.34 but have not yet hit our entry point. Resistance is still $40 so this week will be the long-term key. A move over $40 suggests the selling is over.

Original Trade Description: January 27th

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

With AMBA trade at $35.75

Buy March $32.50 put, currently $2.45, initial stop loss $40.55




BABA - Alibaba - Company Description

Comments:

The Alibaba put was triggered when the stock traded down to $64.85. The death cross has occurred and the stock is now below support and targeting $57.

Original Trade Description: January 29th.

This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.

Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.

Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.

It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.

Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.

The low last week was $65.34. I am recommending a put position with a trade at $64.85.

Position 2/2/16 with a BABA trade at $64.85:

Long March $65 put @ $3.90, initial stop loss $71.65.


HPQ - Hewlett Packard - Company Description

Comments:

No specific news. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



JUNO - Juno Therapeutics

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description

Comments:

Major drop of -$2.73 and a new intraday post IPO low at $24.50. I lowered the stop loss to $28.65.

Original Trade Description: January 22nd

Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

Earnings are March 17th.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.



VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

The market decline lifted the VXX but it did not return to the prior resistance at $26.30. Eventually the volatility will ease. It is only a matter of time.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss






If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now