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Daily Newsletter, Tuesday, 7/22/2014

Table of Contents

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

Market Wrap

Bad Earnings Ignored

by Jim Brown

Click here to email Jim Brown

Multiple negative earnings reports were ignored and the market rallied anyway. We are officially in the Twilight Zone.

Market Statistics

A flurry of Dow components reported earnings today and the results were not good. Despite some sharp declines from those stocks the market rallied anyway and another short squeeze was born. The futures began to rally Monday night after CMG beat earnings by a mile and Netflix failed to disappoint. Hopes for a strong earnings cycle rose and futures rallied. The Dow spiked for the first 40 minutes of trading before flat lining into the afternoon. However, attempts to sell it off into the close eventually failed.

It was a heavy day for economics and most of the data was positive. This added to the premarket futures rally. The Consumer Price Index (CPI) headline number rose +0.3% for June, compared to +0.4% in May. The core rate excluding food and energy rose only +0.1% and in line with estimates. Higher gasoline prices were the major driver of the headline number with a +1.6% rise. Food prices only rose +0.1% and a dramatic decline from the +0.4% average over the last four months.

The core rate of inflation for the last 12 months is +1.9% and the Fed is targeting up to 2.5%. The headline rate is 2.1%, food +2.4% and energy +3.1%. Overall this report substantiates Janet Yellen's claim that the higher inflation earlier in the year was just noise. Longer term inflation is definitely contained.


Existing home sales rallied +2.6% to an annualized rate of 5.04 million units. This is up from 4.91 million in May. This is the fastest pace since October and the severe weather dip has been erased. Home prices are up only +4.3% over the last 12 months. The number of homes for sale are increasing slowly at a +2.2% rate as current owners realize they may not be able to qualify for a loan on a replacement house. Home price appreciation slowed to +4.3% compared to +13% on a trailing 12 month basis for June 2013.

Distressed sales are dropping rapidly as are foreclosures. The share of distress sales dropped to 11% of the total in June, down from 15% in June of 2013. Lower priced homes are shrinking with higher priced homes making up the majority of the homes available on the market. Investor buying is slowing now that prices have firmed and supply of inexpensive homes shrinks.

The separate FHFA Purchase Only House Price Index showed home prices rose +0.5% in May and +5.5% over the trailing 12 month period. This includes new homes as well as existing homes.


The Richmond Fed Manufacturing Survey rose from 4 to 7 for July. The components were mixed and the gain came from the shipments component rising from 1 to 3 and employment rising from 4 to 13. New orders were flat at 5 and backorders rose from contraction territory at -4 to flat at zero. The average workweek declined from 5 to 3 and inventories rose from 8 to 12. Rising inventories suggest consumers are not increasing purchases. The lack of backorders shows a weak order flow and the shrinking workweek suggests part time workers are seeing their hours cut and new hires are coming in under the 30 hour level where health insurance has to be provided under Obamacare. One interesting component was supplier delivery time, which rose from 2 to 12. With all the slack in the economy why is the delivery time rising?

The Richmond Services Survey rose from 9 to 12 for July. The main driver was retail sales revenues. Expected demand for the next six months rose from 10 to 24 and retail demand was expected to rise from 1 to 21. This was a strong report.


The calendar for the rest of the week is light with the Kansas Fed Survey and Durable Goods the only material reports. Of the two the Durable Goods will be the most important because it has a direct impact on the Q2 GDP estimates.

Next week is the FOMC meeting and the next cut in QE. After a tame CPI report there is little worry the Fed will do anything but stay the course and the statement should not contain anything to roil the markets.


Earnings are front and center this week with 12 Dow components and 133 S&P 500 components reporting. Tuesday through Thursday is the most active three days for the earnings cycle.

Dow components were making the biggest headlines and most were not good. Travelers (TRV) reported earnings of $1.93 compared to estimates of $2.07. Revenue rose +2% to $6.79 billion. However, catastrophe losses rose +28% to $436 million. Also today a federal appeals court ruled Travelers had to pay more than $500 million to settle some asbestos related claims stemming from policy holder Johns-Manville.

Travelers does not provide guidance but comments from the CEO seemed to suggest earnings would be pressured for the rest of the year. Shares fell -4% for the day.


McDonalds (MCD) posted earnings of $1.40 compared to estimates for $1.44. Global same store sales were flat with U.S. sales down -1.5%. The company said July comps were expected to be negative. McDonalds is fighting growing competition from places like Five Guys and the addition of sandwiches to the Starbucks menu to name just a couple.

McDonalds warned on Monday a supplier in China shipped them beef and chicken that was out of date and they had to remove some items from the menu and sales were expected to decline as consumers went elsewhere for fast food.


Coca-Cola (KO) reported earnings that declined -3% to 64 cents that beat estimates by a penny. North American volume was flat and global volume rose only +3% thanks to growth in carbonated beverages. U.S. consumers are drinking less carbonated beverages and more water and juices. Sales were actually better because the date for Easter fell favorably into the quarter. That means Q3 could be even worse for sales. The lack of hot weather so far this summer suggests sales could be light.

Diet Coke sales are declining with a drop of up to -2% for the quarter according to JP Morgan. Diet carbonated beverages are declining for everyone as the health negatives become better known. On the conference call the company said consumer skepticism about the safety and quality of artificial sweeteners was weighing on sales. Higher commodity costs related to the juice beverages also weighed on earnings.


DuPont (DD) reported adjusted earnings of $1.17 that were in line with estimates. Revenue declined -1.4% to $9.71 billion and missing estimates for $10.02 billion. The company said weak sales as a result of a wet spring were continuing into Q3. The company warned operating earnings at the agricultural unit would be down -11% in Q3. Sales were expected to decline to $9.71 billion compared to analyst estimates of $9.79 billion. The company said farmers were concentrating on soybeans instead of corn and soybeans made up only 14% of DuPont's 2013 sales.


Altria Group (MO) reported earnings of 65 cents compared to estimates of 66 cents. Tobacco volume declined -5%. The stock declined only fractionally on the earnings miss because they announced a $1 billion stock buyback.

Kimberly Clark (KMB) reported earnings that declined -3.2% to $1.49 per share and in line with estimates. Revenue rose +1.4% to $5.34 billion and slightly better than the $5.31 billion expected. The company narrowed full year guidance to the low side from $6.00-$6.20 to $6.00-$6.15. shares declined -3% on the report.


Harley Davidson (HOG) reported earnings of $1.21 compares to estimates for $1.46. The company also cut full year guidance to 270,000-275,000 bikes compares to prior guidance for sales of 279,000-284,000 bikes. The company blamed the weak Q2 performance on the lingering winter weather that kept people out of the showrooms early in the quarter. However, they sold 58,225 bikes in the quarter compared to 58,241 in Q2-2013. That is not much impact from weather. Shares fell -5.4% on the report.

I think it is strange that they had an 18.7% jump in sales in Q1 when the weather was the worst and blowout earnings of $1.21 compared to estimates for $1.07. So why did Q2 weather hurt them so badly? Can you say, "Convenient excuse."


At the same time Harley was suffering from the cold Polaris (PII) was selling everything in stock. I know it is an unfair comparison since Polaris makes snowmobiles and four-wheelers as well as motorcycles but I could not resist the comparison.

Polaris reported earnings of $1.42 which rose +26% and beat estimates by +3 cents. Revenue rose +20% to $1.014 billion and slightly ahead of consensus. They also raised full year guidance to $6.48-$6.58 per share up from $6.30-$6.45, an increase of 21% on revenue growth of 17%. Analysts were expecting $6.49. North American sales rose +15% in Q2.


Lockheed Martin (LMT) profits rose +3.5% to $2.76 compared to estimates for $2.66. The company also raised full year guidance from $10.50-$10.80 to $10.85-$11.15. Total revenue declined -1% to $11.31 billion due to a decline in U.S. spending. Shares rallied +3% to $168 and the prior resistance high.


After the bell Microsoft (MSFT) reported adjusted earnings of 66 cents compared to estimates for 60 cents. Those comparisons may not be apple to apples. Some analysts did not factor in the impact of the Nokia acquisition and some did. Microsoft said their actual earnings were 55 cents after subtracting 8 cents for Nokia and 3 cents on restructuring charges. Revenue rose +18% to $23.4 billion with $2 billion coming from Nokia. This was slightly ahead of the $23 billion expected.

Microsoft said it was cutting up to 18,000 jobs and would take charges over the next two quarters between $1.1 to $1.6 billion. The new cloud services and software effort produced $4.4 billion in revenue. The company is also benefitting from the end of Windows XP, an OS version that lasted 12 years. They sold $409 million in Surface tablets, 1.1 million Xbox consoles, and 5.8 million Lumia smartphones and 30.3 million lower priced non-Lumia models it is discontinuing.

Shares rose 50 cents in afterhours.


Apple (AAPL) reported earnings that rose +12% to $1.28 and beat estimates of $1.23 on a 6% rise in revenue to $37.43 billion. Revenue missed estimates for $37.99 billion. The rumor of a 4.7 inch iPhone 6 plus a 5.5 inch model probably weighed on iPhone 5 sales in the quarter that totaled 35.2 million. That was a +13% rise in volume but Apple said it would have been more but the leaks from suppliers on the new products ahead restrained sales. If the bigger screens appear as expected it could be an explosive quarter for Apple sales.

iPad shipments totaled 13.3 million and a -9% drop. That is the second consecutive quarter for declining iPad sales. Apple hopes the newly announced partnership with IBM will provide a boost to tablet sales. Apple was granted a patent this week for a "touch screen device to be worn on the wrist" and it will be called iTime rather than the iWatch. This patent makes it even more likely the iTime product will be announced in Q3.

Shares of Apple declined -44 cents in afterhours.


Electronic Arts (EA) announced adjusted earnings of 19 cents compared to estimates for a loss of -4 cents. Shares initially rallied strongly in afterhours but then fell back to earth to close down -30 cents. The company said on the call it had delayed the launch of the next version of "Battlefield" until early 2015. Previously it was expected before the holiday shopping season and this will hurt Q4 sales. The company did reaffirm full year revenue of $4.1 billion and earnings of $1.85 despite the delay in Battlefield. CFO Blake Jorgensen said the company was seeing strong headwinds on sales of products for the older Xbox console while sales for the new Xbox and Sony PlayStation were running 90% ahead of the older models.


Chipotle Mexican Grill (CMG) reported blowout earnings Monday night and the stock rallied +12% today. Chipotle's earnings are a slap in the face to McDonalds. The company sells higher priced fast food and sales are booming. If you have the right menu consumers will beat a path to your door.

The company's same store sales rose +17.3% and they opened 89 new stores so far this year. They currently have about 1,700 stores on their way to 4,000 in the U.S. alone. They expect to open up to 195 stores in 2014. Revenue is expected to rise +25% from the current $4.5 billion to more than $5.5 billion in 2015. Revenue in Q2 rose +26% to $1.05 billion. Earnings increased +24% to $3.50 per share. For comparison YUM Brands reported a 2% increase in Taco Bell's sales and McDonalds reported a -1.5% decline in U.S. sales. Chipotle is showing everyone else how to run a fast food chain.


So far this earnings cycle 23% of the S&P have reported, prior to today, and 66.1% beat on earnings while 22.6% missed estimates. The earnings growth so far has been close to 7% and well over the revised estimates of 3.3% just a couple weeks ago. However, 77 companies have warned on guidance so there are still some problems in earnings world.

Earnings due out on Wednesday include Facebook, Boeing and Gilead with Facebook probably the most watched. Thursday is another big day with numerous high profile reporters and then the announcement calendar begins to fade next week.


Walmart (WMT) said it was cutting back-to-school (BTS) prices by another 10% and increasing the number of BTS products on its website by 30% to 75,000. Walmart is suffering from five consecutive quarters of sales declines and they are pulling out all the stops for this BTS season. Teachers who shop there are eligible for e-gift cards for 10% cash back on 15,000 products. It is the first time Walmart has offered a cash back program. The company estimates teachers spend about $1,000 preparing their classrooms for the fall semester. Half of that comes from their own pockets. WMT shares were down fractionally.

Pershing Square Capital Management's Bill Ackman had a very public humiliation today. On CNBC on Monday he said he was giving a presentation today that would be a death blow for Herbalife (HLF). Ackman has a $1 billion short on Herbalife with an average cost of $40. He has been battling the company in high profile appearances since 2012 and the stock refuses to die.

Yesterday the stock fell -12% after Ackman promised the death blow in his presentation today. He said it will be the most important presentation of his career. Unfortunately he over promised and under delivered. There was no death blow and investors rushed back into Herbalife while he was speaking and pushed the stock up 25.4% for the day. In the middle of his three hour presentation he was told the stock was spiking and he tried to blame it on Herbalife's stock buyback program and the company trying to make him look bad. Shares rallied +14 to $68 and a five-month high.

Trading volume was the most since February 2013 at 98.1 million shares. That is hardly a buyback program in progress. It was a massive short squeeze after Ackman promised on Monday the stock was going to zero. So many people believed him that stock lost -$9 immediately after his CNBC appearance. All of those shorts and probably a lot that were already short were scrambling to exit the stock on the rocket ride higher. Ackman shot himself in the foot with his bragging on Monday and it was a very expensive lesson. In addition to his $1 billion short position he spent more than $50 million on private investigators and undercover operatives to study Herbalife methods. More than 10,000 man hours were involved. All this and no death blow?


Apache (APA) spiked today after Jana Partners said they had acquired a stake worth more than $1 billion and wanted to talk to the board about options. Jana wants Apache to sell off its international holdings and drill only in North America. Apache has sizeable holdings in Egypt, Australia and the Kitimat LNG project in Canada. Apache is already working on selling off non-core assets so this could be a match made in heaven. Shares rallied 4.6% to a new high on the news.


The markets rallied today but it all came in the first 40 minutes of trading. It was a futures related short squeeze and once the indexes hit their highs around 10:10 the volume died and no further progress was made. Total volume was light at 5.2 billion shares and only slightly more than the 4.9 billion on Monday.

The S&P rallied to 1,986 intraday and just a point over the 1,985 level analysts are claiming as strong resistance. That was the high close back on July 3rd. As we move farther into the Q2 earnings cycle and more stocks begin to experience "post earnings depression" after their reports the harder it will be for the markets to move higher. Once a company reports earnings and any short squeeze fades the excitement is over. Traders exit the stock and move to some company that has not yet reported. The prior stock is left to settle to a point where fundamental investors are comfortable adding shares. This post earnings depression can last from a few days to a few weeks and the declines can be substantial.

Since this is the summer doldrums earnings cycle the post earnings depression typically lasts longer because investors are on vacation and not focused on the market. We need to watch carefully for the S&P to weaken. If it is successful in breaking out to a new high the 2,000 level is a natural round number selling point so any forward progress may be limited.

The 62 day streak without a 1% move ended on Thursday.

Support remains 1950-1960 with resistance 1985-2000.


The Dow may have rallied +80 points at the open but that was the high of the day at 17,133. The index moved perfectly sideways until a minor sell program hit about 2:15 but that dip was bought. The Dow remains in its uptrend channel with resistance now the prior high at 17,138 and 17,200.

It was a miracle the Dow rallied at all with the negative earnings events from multiple Dow components. We need to thank Goldman, IBM and Visa for offsetting losses in DD, KO, MCD, UTX and TRV. The gains in the winners came at exactly the right time.



The Nasdaq 100 ($NDX) broke out to a new high but it all happened in the first 30 min of trading. There was no forward progress after 10:AM. This is a new 14-year high but it may be difficult to maintain since Microsoft and Apple both failed to rally after their earnings tonight.


The Nasdaq Composite finally punched above short term downtrend resistance but the gain was a struggle. Initial resistance is 4,465 with the 4,485 closing high from July 3rd the next target. I don't have a lot of faith in the Nasdaq Composite today. There are some high profile tech earnings due out on Thursday but the MSFT/AAPL results tonight may be the equivalent of jumping the shark for those familiar with the Happy Days analogy.

If the Nasdaq Composite falls back into the congestion range around 4,420 it may have a difficult time breaking out again. This current breakout needs to continue tomorrow or investors are going to become discouraged and head for the beach.



The Russell 2000 is struggling. The +9 point gain today failed at the 1,160 resistance level and this would be a good place for the index to roll over and retest the lows from Thursday at 1,131. The Russell rebound from those Thursday lows has been lackluster and we need to see some more excitement here or the index is going to drag the broader market lower.


I have been recommending buying the dips for the last several months. I am starting to worry we may be coming to the end of that trend of successful rebounds. This is summer and the indexes are struggling at the highs. Once the earnings excitement fades we could be in for a slow, choppy decline into August. The next two months are typically the worst two of the year for the markets and while a rally is always possible we need to be on alert for an alternate reality. Markets don't go up forever and it has been more than two years since a 10% correction. Tiptoe lightly through the coming minefield. Reduce your long positions to only those with the best relative strength. We don't want to run from the market but simply manage our risk in case a decline does appear.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Old School Tech

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Hewlett-Packard Co. - HPQ - close: 35.15 change: +0.63

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Listed on July 19, 2014
Entry on July -- at $---.--
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: Yes, see below

Company Description

Why We Like It:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

Trigger @ $35.35

- Suggested Positions -

Buy HPQ stock @ (the trigger)

- or -

Buy the Sep $35 call (HPQ140920C35) current ask $1.53

Option Format: symbol-year-month-day-call-strike

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Rally On Earnings Headlines

by James Brown

Click here to email James Brown

Editor's Note:
Better than expected earnings headlines helped fuel another market rally on Tuesday.


Current Portfolio:


BULLISH Play Updates

SoftBank Corp. - SFTBY - close: 37.99 change: +0.09

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +3.6%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

Comments:
07/22/14: It was another quiet day for shares of SFTBY. The stock hovered near the $38.00 level and barely squeaked out a gain.

SFTBY remains underneath resistance near $38.50.

Keep in mind that Alibaba is still expected to IPO this summer. There has been some speculation it could happen later this month. Others believe Alibaba wants to IPO on the "lucky" date of August 8th. The number eight is considered a lucky number is Chinese culture. However, there has been new speculation that Alibaba may not IPO until after Labor Day (September 1st).

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

07/11/14 News hits that SFTBY might buy T-Mobile soon.
06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.



BEARISH Play Updates

DSW Inc. - DSW - close: 27.66 change: +0.01

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: - 2.8%

Entry on July 16 at $26.90
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
07/22/14: DSW spent Tuesday's session consolidating sideways and closing virtually unchanged. That's actually good news for the bears since most of the market was in rally mode today.

I am not suggesting new positions at this time.

Earlier Comments: July 12, 2014:
DSW Designer Shoe Warehouse runs over 400 company-owned stores. They also participate in hundreds of other shoe departments in regional department stores through their Affiliated Business Group.

There appears to be a bear market in designer shoes. At least that is the picture if you're looking at shares of DSW Inc. The stock has actually been a big winner for investors if you have owned it the past few years. On a post 2-for-1 split adjusted basis DSW traded down to $3.33 in 2009. It peaked in 2013 with a close at $47.22 in November last year. That's a huge run (more than 1,400%). Unfortunately last November was indeed the peak. DSW has been stuck in a bearish trend of lower highs and lower lows since then.

DSW lowered its earnings guidance back in February 2014. Of course back then just about all of the retail companies were warning about lack of sales and blaming it on the extremely cold winter weather. That was after weeks of worry over the 2013 holiday shopping season.

The U.S. economy is slowly recovering but consumer spending has not. There are still large chunks of the consumer who continue to struggle. The sharp rise in food prices this year combined with elevated gasoline prices has not helped. There seems to be a bifurcation in the consumer spending. There has been strong demand for big ticket items like housing and cars. Yet smaller discretionary spending is just not there.

The overall retail industry saw some improvement in May. There was hope that June same-store sales would come in better than expected. Analysts and investors were a bit disappointed when the retail industry delivered June numbers that were only in-line with estimates.

Meanwhile DSW continues to struggle. The company reported earnings on May 28th. Wall Street was expecting a profit of $0.48 per share on revenues of $622.9 million. DSW announced earnings of 42 cents on revenues of $599 million. A miss on both counts. Management then lowered their 2015 guidance. The company blamed the weather (again) and said they were facing an intense promotional retail environment. The Container Store (TCS) has a completely different product mix but recently mirrored DSW's troubles and said they were experiencing a retail "funk" (i.e. lack of sales).

Shares of DSW dropped from $32.50 to $23.60 on its earnings miss and earnings warning late May. Since then the stock has bounced but it has found new resistance in the $28.50 area. Now DSW looks like it is rolling over again.

Friday's low was $27.20. I am suggesting a trigger to open bearish positions at $26.90. If triggered I'm expecting DSW to at least test its May lows if not breakdown to new lows.

We will plan on exiting prior to DSW's late August earnings report.

current Position: short DSW stock @ $26.90

- (or for more adventurous traders, try this option) -

Long OCT $25 PUT (DSW141018P25) entry $1.05

07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike



Five Below, Inc. - FIVE - close: 35.99 change: +1.59

Stop Loss: 36.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
Entry on July -- at $---.--
Average Daily Volume = 1.0 million
Listed on July 21, 2014
New Positions: Yes, see below

Comments:
07/22/14: It looks like Wells Fargo does not agree with our bearish opinion on FIVE. The company upgraded FIVE to an "outperform" and said they believe FIVE is seeing its "growth opportunity increasing".

Shares of FIVE popped +4.6% today but you'll notice the rally stalled near technical resistance at its simple 10-dma and prior support near $36.00. It may end up being just a one-day move.

We are on the sidelines with a suggested bearish entry point at $33.75. If FIVE continues to rally then we'll remove the stock as a candidate.

Earlier Comments: July 21, 2014:
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across a number of our category worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal (which we refer to as "Now"). We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management's experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to teens and pre-teens, as well as customers across a variety of age groups beyond our target demographic (source: company website).

FIVE has been suffering from a multi-year trend of lower same-store sales growth. The first quarter of 2014 broke that down trend with same-store sales growth of +6.2%. Management had previously guided in the 3-4% range and analysts were only expecting +3.8%. Meanwhile total sales surged +31.8% to $126 million, beating estimates of $121.9 million. The overall sales growth was a combination of adding new stores and the better same-store sales. Unfortunately FIVE guided lower in its Q1 report (June 4th). Management also guided for full-year 2014 same-store sales growth of just 4%.

FIVE opened 19 new stores in the first quarter bumping its total to 323 stores. Their long-term plan is 2,000 stores. That might be a warning signal. The FIVE co-founders have tried retail before with the Zany Brainy chain that sold toys and games. Zany Brainy eventually went bankrupt and one of the reasons blamed for the failure was growing too fast.

There have been plenty of bears claiming that shares of FIVE are too rich. The company's P/E is about 55. That is pretty expensive but growth names tend to carry high valuations. They are seeing strong revenue growth. That growth could face tough competition.

Wal-Mart (WMT) unveiled plans to start building smaller "neighborhood" stores in an effort to win back some market share. WMT plans to boost these smaller stores from 346 in 2014 to over 500 in 2015. Given WMT's strength in this industry they could squeeze FIVE's margins.

Shares of FIVE has been underperforming the major indices. The stock peaked near $55 a share back in November 2013. Since then investors have been selling the rallies and FIVE now has a bearish trend of lower highs. Today shares of FIVE are hovering above major support near $34.00. A breakdown could launch the next leg lower. The Point & Figure chart is currently bearish and forecasting at $28 target.

The February 2014 low was $33.94. We are suggesting a trigger to open bearish positions at $33.75.

Trigger @ $33.75

- Suggested Positions -

short FIVE stock @ (trigger)

- or -

buy the Nov $30 PUT (FIVE141122P30)

Option Format: symbol-year-month-day-call-strike


Fiesta Restaurant Group Inc. - FRGI - close: 42.16 change: -0.68

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: +3.6%

Entry on July 21 at $43.75
Listed on July 19, 2014
Time Frame: Exit PRIOR to earnings on Aug 5th
Average Daily Volume = 271 thousand
New Positions: see below

Comments:
07/22/14: FRGI continues to sink. The stock underperformed the market with a -1.5% decline. Maybe traders are worried that Chipotle Mexican Grill (CMG) is eating FRGI's lunch. FRGI has about 99 locations in Florida. CMG has 96. While FRGI's same-store sales for their Pollo Tropical brand have been okay they have not been good for their Taco Cabana chain. Yet CMG's same-store sales are an extraordinary +17%.

Today's drop in FRGI is a breakdown below potential technical support at its 50-dma and the 100d-ma. The next level of support is probably the $40.00 mark.

Earlier Comments: July 19, 2014:
Fiesta Restaurant Group, Inc. (FRGI) specializes in fast-casual, ethnic restaurant brands. They currently own, operate, and franchise the Taco Cabana and Pollo Tropoical brands with more than 300 locations across the southern United States, the Caribbean, Central and South America. Most of their stores are located in Florida.

FRGI was the best performing restaurant stock last year with a gain of 240%. Yet shares have been seriously underperforming this year with a -15.5% decline and that's after the eight-week rally from its May 2014 lows.

The company is growing. They're expected to boost their store growth by 17 percent this year. Their latest earnings report was mixed. FRGI delivered a profit of 33 cents per share when Wall Street was looking for 30 cents. Revenues were up +8.8% year over year to $145.4 million. That's nice growth but analysts were expecting revenues of $147.5 million.

Same-store sales and traffic were up +6.3% and 4.6%, respectively at the Pollo Tropical brand. Yet the Taco Cabana brand only saw +0.8% sales growth and traffic was negative.

The U.S. restaurant industry saw first quarter traffic decline. It looks like the trend continues in the second quarter. Industry wide traffic declined -1.7% in June. That's the 19th consecutive month of negative traffic. Now FRGI does seem to be outperforming its peers in the restaurant industry but it does seem to be swimming up stream against a cautious consumer spending environment.

The rally off FRGI's May lows appears to be breaking down. FRGI has been consolidating sideways the last few days and looks poised to break support at its simple 200-dma soon.

We think it will break down. I would consider this more of a short-term technical trade than a bearish call on FRGI's fundamental business. The $35-37 area looks like it could be significant support. We'd like to try and capture the drop.

Tonight I'm suggesting a trigger to open bearish positions at $43.75 with a stop loss at $45.75.

FRGI is scheduled to report earnings on August 5th and we do not want to hold over the announcement.

Current Position: short FRGI stock @ $43.75

07/21/14 triggered @ 43.75