Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/24/2017

Table of Contents

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

Market Wrap

Animal Spirits Return

by Jim Brown

Click here to email Jim Brown

The markets finally posted a decent day where every index participated and the Nasdaq was roaring.

Market Statistics

Today's rally was remarkable for one major reason. Five Dow components reported earnings. Those were MMM, DD, JNJ, TRV and VZ. Of those five companies, four of them were the biggest losers for the day. Those four stocks knocked more than 56 points off the Dow and that would have normally been enough to turn the direction negative for the day. Instead, IBM and DD combined to add more than 55 points to the Dow and completely erase the earnings negativity. This was a rare day indeed. Note that it only took a combined gain of 16.48 actual points to lift the Dow +112.86 points. That is the crazy part about a price-weighted index.


There was a flood of positive economic information this morning that helped lift the markets.

The Existing Home Sales for December came in slightly lighter than expected at 5.49 million with analysts expecting 5.50 million. The November headline number was 5.61 million on an annualized basis. This was still a good number for a winter month. The minor drag came from a slowdown in condo sales. Single-family home sales were 4.88 million, a decline of only 9,000 units. Condo and co-op sales were 610,000, down -70,000 from November. The homes on the market declined sharply to only 3.6 months of inventory at the current rate of sales. That was 4.7 months of supply back in July. The median home price declined from $234,400 to $232,200 but with the rapidly declining inventories, that price is sure to rise.


The Richmond Fed Manufacturing Survey continued to improve with the headline number rising from 8 to 12. The internals components, especially the new orders and employment added significantly to the headline number. The backorders declined but the inventory to order gap moved sharply higher suggesting more activity will be seen in the coming weeks.

That headline number was higher than all but one month in 2016. It is also the first time since July 2015 that the index has posted three consecutive months of gains.

In the separate services survey the headline number jumped from 4 to 15. That is the highest reading since October 2015.



The North American Semiconductor Industry (SEMI) Book-to-Bill ratio for December rose from 0.96 to 1.06. That means $106 in orders were received for every $100 of product shipped. In December, companies received $1.987 billion in orders compared to $1.865 billion in shipments. This is the last time SEMI will produce this report. They said a change in the way some companies report/track orders and billings was responsible.


The calendar for the rest of the week is uneventful except for the GDP on Friday. Traders will be focusing on the Fed meeting next week and the rate decision on Wednesday.


Dow component DuPont (DD) reported earnings of 51 cents that easily beat estimates for 42 cents. However, revenue of $5.211 billion missed estimates for $5.246 billion. They guided for Q1 earnings to decline roughly 18% year over year but that includes a 15-cent charge for the costs associated with the Dow Chemical merger. Their adjusted earnings should rise 8%. The company pushed back the anticipated date for closing the merger to the end of June and three months later than expected. The company needs the extra time to address concerns by regulators that the merger will restrict new pesticide discoveries. The EU granted them an extension until March 14th to provide additional data for review. DuPont shares soared 4.5% on the news.


Dow component Verizon (VZ) reported earnings of 86 cents that missed estimates for 89 cents. Revenue of $32.3 billion narrowly beat estimates for $32.1 billion. Wireless revenues declined -1.5% to $32.4 billion. Wireless Ebitda margins of 36.9% missed expectations for 40.2% by a wide margin. The company did not provide any update on the Yahoo acquisition other than to say they were pushing the date out another three months while they assess the impact of the multiple data breaches. The CFO said they have not reached any final conclusions yet. Shares fell -4.4% on the report.


Dow component Travelers (TRV) reported earnings of $3.20 that easily beat estimates for $2.80. Revenue of $7.19 billion also beat estimates for $6.07 billion. The earnings beat was driven by a settlement of a reinsurance dispute and higher returns from investments. Shares declined -1% on the news.


Dow component Johnson & Johnson (JNJ) reported earnings of $1.58 that beat estimates for $1.56 per share. Revenue of $18.11 billion barely missed estimates for $18.12 billion. They guided for 2017 to earnings in the range of $6.93 to $7.08 and analysts were expecting $7.11 per share. Revenue guidance was $74.1 to $74.8 billion with analysts expecting $75.1 billion. The company said the strong dollar was going to be a problem in 2017. Shares fell -2% on the news.


Dow component 3M (MMM) reported earnings of $1.88 compared to estimates for $1.87 per share. Revenue of $7.33 billion missed estimates for $7.37 billion. They guided for full year earnings $8.45 to $8.80 per share. Analysts were expecting $8.64 per share. The company beat on earnings thanks to some aggressive cost controls rather than rising sales. Revenue only rose from $7.298 billion to $7.329 billion. The strong dollar reduced sales by 0.8% and they expect the pressure to continue. Shares fell -2.50 on the news.


Lockheed Martin (LMT) reported earnings of $3.25 that beat estimates for $3.05 per share. Revenue of $13.75 billion also beat estimates for $13.03 billion. For all of 2017 the company expects earnings of $12.25 to $12.55 and that is below estimates for $12.88. Revenue guidance for $49.4 to $50.6 billion was above estimates for $49.5 billion. Shares fell -4.57 on the news.


Alibaba (BABA) reported adjusted earnings of $1.30 compared to analyst expectations for $1.15 per share. Revenue of $7.67 billion rose 54% and beat estimates for $7.48 billion. Part of the revenue surge came from a record breaking Singles Day in November. Shoppers spent $17.4 billion and Alibaba said at one point it was processing 175,000 orders per second. Alibaba does not report revenue on items sold by third parties but only on the commission received from those sales. The company is projecting 53% sales growth in 2017. That is up from the prior forecast for 43% growth. They reported 443 million annual active buyers last quarter. The monthly active "users" rose from 393 million to 493 million. Cloud computing revenue rose +115% to $254 million. Digital media and entertainment revenue spiked +273% to $585 million. Shares rallied 3% on the news. I wonder if Jeff Bezos and team are always grouped together in a conference room waiting for the BABA earnings so they can pour through them looking for strengths and weaknesses?


On the topic of Amazon, Consumer Intelligence Research Partners (CIRP) said the company sold 3.1 million Echo devices in Q4 and 8.2 million in 2016. They would have sold more but they ran out of inventory in the first week of December. For comparison, Google Home has sold about 500,000 units. With more than 3,000 branded skills for the Echo, Amazon has a big head start in monetizing the product. A skill would be something like "Alexa, schedule me an Uber ride to the airport at 10:AM on Thursday." Another example would be "ask CNBC for the latest headlines" or a "stock quote on IBM." In the future, these will not be free for the brands. Amazon earnings are Feb-2nd.


After the bell, Seagate (STX) reported earnings of $1.38 compared to estimates for $1.07. Revenue of $2.89 billion beat estimates for $2.82 billion. That was up from 82 cents in the year ago quarter. The company also announced a 63-cent dividend payable April 5th to holders on March 22nd. Analysts are going to have to come up with some new price targets. The consensus target was $39.73 and shares spiked to close at $42 in afterhours. The company guided for current quarter revenue of $2.7 billion compared to forecasts for $2.61 billion. They guided for full year earnings of $4.50 per share.


Cree Inc (CREE) reported earnings of 30 cents compared to analysts expectations for 8 cents. Revenue of $347 million also beat estimates for $325 million. However, for the current quarter they guided for revenue of $285 to $315 million and earnings of 9 cents. Analysts were expecting $315 million and 8 cents per share. Shares spiked to $30.50 on the earnings but collapsed back to $28 on the guidance.


Only two Dow components report earnings on Wednesday with three on Thursday. The Thursday calendar is strongly tech weighted and that means Friday's market open could be volatile.


Bob Evans Farms (BOBE) said they were selling their restaurants to PE firm Golden Gate Capital for $565 million. The company would then be free to focus on its refrigerated foods grocery business. They will use a portion of the proceeds to pay a special onetime dividend of $7.50. The sale is the result of a long running fight since 2013 with activist investor Sandell Asset Management to separate the BEF Foods. Separately the company is buying Pineland Farms Potato Co for $115 million. Both transactions are expected to close by the end of April.


Barclay's downgraded Apple (AAPL) from overweight (buy) to equal weight (neutral) saying there is no growth potential for Apple. The analyst said Apple would be weighed down by sluggish smartphone sales in general, not just slowing iPhone sales. Barclay's reduced the price target from $119 to $117 saying the company's sticky ecosystem and large cash holdings could continue to support the stock price near term. Currently there are 35 buy ratings, one hold rating and one sell rating on Apple shares. I expect better things out of Apple later this year when they release the 10th anniversary iPhone. I expect those sales to be strong. Apple's current challenge is resistance at $120.


Crude prices rose only fractionally thanks to a minor decline in the dollar on Monday. Today's market action was neutral. WTI declined -27 cents in afterhours to $52.91. There is no future in trading crude for the next several weeks. All the movements will be headline related and they are likely to contradict from headline to headline.



Markets

Tuesday was a very interesting day. With a couple Dow stocks outweighing four major post earnings decliners we saw a strong short squeeze in the morning hours. The S&P and Nasdaq rallied to new highs but the Russell and Dow, despite their gains, remain below resistance.

Wednesday could be even more interesting. With the S&P slightly above 2,280 we could see some more short covering. It that is strong enough it could trigger the start of a new leg higher for the S&P. Volume was strong at 7.0 billion shares and advancers were 5,266 to 1,863 decliners. New highs totaled 588 and the strongest day since December 13th, when the Dow pushed through 19,950 intraday for the first time. We have been moving sideways ever since.

The close above 2,280 was just enough to claim the statistic but not enough to really trigger any further buying. The intraday high was 2,284.63 and that was not enough to punch through that new high resistance. We need to see the S&P trade over 2,285 and hold it to convince the shorts it is time to cover and switch to longs. The S&P futures are only fractionally positive and there is no sign of buying overnight despite the Asian markets being up strongly.


The Dow finally rebounded back into its recent range but the 19,912 close is still about 88 points below the 20,000 level and as we have seen in the past, there is a lot of resistance between here and 20K. The more Dow components that report earnings, the weaker the Dow should become. The week or two of post earnings depression that follows each report is going to be a drag on the index. That is especially true if those companies continue to miss on earning, revenues and guidance.

The critical levels for the rest of the week are 20,000 and 19,800.


The Nasdaq closed with a major gain of 48 points and a real breakout to a new high at 5,600. That is a big round number so it will be interesting to see if the gains continue. The rally was a combination of chips, biotechs and the FANG stocks. Note that Apple is not in the list.

There is nothing negative about the Nasdaq chart. It was a clean breakout and is now well above that 5,530 support I wrote about for the last two weeks.



The Russell 2000 posted a strong 21 point gain but that was only enough to get it back over support but not enough to even touch that resistance at 1,375 that held all last week. The small caps appear to have relinquished their leadership role to the Nasdaq for the time being.


I wrote all last week that the Nasdaq and S&P appeared to be preparing for a breakout. Now that it has happened, we need a couple more days of gains to pull the Dow through 20,000 and help the Russell move to a new high as well. The sentiment in the market is improving on a daily basis. It appears the Trump honeymoon may have been revived. He is turning into the energizer bunny with nonstop meetings and pro growth comments. If he can keep that up for the first 100 days, we could be a lot higher by summer.

JP Morgan CEO, Jamie Dimon, not originally a fan of Trump during the primaries has turned into a convert. Almost daily, he points out the multiple positives that will push the market higher. He said something this week to the effect of "investors have not seen anything yet if Trump can actually get some of this stuff accomplished." Add to that the rebound in the global economies and Dimon expects solid 3% to 4% GDP growth ahead. That is the kind of talk that can push investors off the sidelines and back into the market.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

No Excitement

by Jim Brown

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Editors Note:

The S&P futures are only up fractionally tonight after a big day in the market. The morning short squeeze lost traction about 1:30 and the indexes were moving down at the close. We are not out of the post inauguration week yet and although the internals are turning bullish there is no reason to rush into the market. Let's see if the rally sticks.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

New Direction?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market may have just picked a post inauguration election with the S&P closing at a new high. The lack of any material declines and constant dip buying finally produced a surprising rally despite some big losses from Dow stocks reporting earnings today.

The S&P and Nasdaq both closed at new highs and the Dow and Russell 2000 posted significant rebounds. For once all the indexes were moving in the same direction. It is too soon to know if the Dow will continue its gains and punch through 20,000 but that target is back in the crosshairs once again.



Current Portfolio


Stop Loss Updates

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


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


PANW - Palo Alto Networks

Long call position was entered at the open.

SPY - S&P-500 ETF

Long call recommendations remains unopened until $223.25 or $228.25.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. Excellent start to the position with a breakout over $142.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85


RHT - Red Hat Inc - Company Profile

Comments:

No specific news. RHT announced two new users including TransUnion and Swiss Federal Railways.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

So close! The SPY hit a high of $228.08 and skillfully avoided our entry trigger at $228.25. The intraday rally was strong but once the S&P hit 2,280 it came to a dead stop. We could be poised for a breakout this week.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

With a SPY trade at $223.25

Buy MAR $227 call, estimated to be $3.00 or less, no initial stop loss.

With a SPY trade at $228.25

Buy MAR $232 call, estimated to be $3.00 or less, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

Big rally intraday but lost traction at 1:30. The pattern is still a lower high until it hits 20,000 on the Dow.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


FINL - Finish Line - Company Profile

Comments:

No specific news. Major rebound in a bullish market. Trend is still negative. I did lower the stop loss.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


LB - L Brands - ETF Profile

Comments:

No specific news. Support at $60 still holding. Analysts claim the closure of the 250 Limited stores will be good for L Brands in the future. I lowered the stop loss.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.




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