Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/30/2014

Table of Contents

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

Market Wrap

Tax Selling and Profit Taking

by Jim Brown

Click here to email Jim Brown

Today's decline was no surprise. I warned this week would be choppy as procrastinators finally made the decision to restructure their portfolios before 2014 comes to a close.

Market Statistics

This week is normally choppy as the laggards take profits and/or sell their losers before the tax deadline at Wednesday's close. This is kind of like Christmas shopping. There are always some people who put it off until the last minute. With very low volume these last minute moves tend to move the market.

There were no economic reports driving traders. The Consumer Confidence report for December rose from an upwardly revised 91.0 to 92.6. While still below the October eight-year high at 94.1 it was still strong. November's headline number was revised up from 88.7 to 91.0.

The present conditions component rose from 93.7 to 98.6. The expectations component declined from 89.3 to 88.5. That was the second consecutive monthly decline. Those planning on buying a car declined from 12.9% to 12.1%. Prospective home buyers declined from 6.5% to 4.8%. Appliance buyers rose from 51.6% to 52.2%.

Only 18% of respondents expected business conditions to improve over the next six months. However, those that think current conditions are bad declined from 21.8% to 19.6% suggesting conditions may be improving.

The falling gasoline prices probably influenced the gains in the current conditions component while the normal post Christmas letdown and worry about paying those credit card bills with holiday charges may have depressed the expectation component.


The Texas Service Sector Outlook Survey declined from 17.3 to 12.7 and the third consecutive month of decline from the 27.4 high in September. All but one component declined and that was hours worked with a rise from 4.4 to 7.3, which should be a precursor to additional hiring except this could have been retail workers extending holiday hours.

Tomorrow's calendar is also weak with pending home sales the only material report. With the focus on energy recently the oil inventory report could also be a market mover on low volume. Last week's unexpected 7.3 million barrel gain was a weight on the market.

Friday's ISM is going to be the big report for the week but nobody will be around to see it. Volume will be extremely low so any unexpected decline in the ISM could be market negative.


The news moving the markets at the open was a protest in front of the Kremlin in Moscow. The protest was in opposition to the sentencing of Oleg Navalny, a blogger critical of the government who was convicted of embezzling money. He received a 3.5 year sentence while his brother Alexei who was convicted of the same crime received a suspended sentence.

Writing against the government in Russia is a criminal offense. The sentencing was thought to be a message to other bloggers to be careful what they say or they will be next. If your blogging does not violate some specific crime the government will make one up and convict you of that one. If you own a business the government wants they will charge you with tax evasion or EPA violations and seize the business. This is how things get done in Russia. However, if you agree to accept Putin as a partner in your business you will prosper. Putin is reportedly worth $150 billion as a result of corruption and partnerships like these.

The police moved in quickly to break up the protest with as many as 100 arrested. The U.S. State Dept called the sentencing of the brothers a "disturbing development designed to punish and deter political activism." Alexei was an opposition leader three years ago when tens of thousands took to the streets to protest Putin and the inner circle. Opposition leaders today claim jailing Alexei would have risked a new wave of protests so the government punished Alexei by jailing his brother instead.

Putin is on the verge of some serious trouble in Russia and he has to keep a firm hand on the population to prevent demonstrations from getting out of hand. Expect more protests in the future and more protestors going to jail. Analysts claim this is not a repeat of 1998 when Russia defaulted on its debt but Russia is in serious financial difficulty.

The markets were still weak as a result of the Greek presidential vote over the weekend. The third parliamentary election failed to elect a president and endorse the choice of Prime Minister Samaras and that means a general election will be scheduled for early in 2015 and there is a good possibility an anti-EU candidate could be elected and throw the economic recovery into jeopardy. The opposition candidate likely to run is against the bailout by the Troika and against the EU.

Treasuries rose for the second day on the worries over Russia and Greece. The yield on the ten-year declined to 2.19% after hitting 2.3% last Wednesday.


The best thing that happened all day was my friend Art Cashin celebrating his 50th anniversary of being a NYSE member. He started on December 30th, 1964, 50 years ago at the age of 23. He was one of the youngest to ever hold a seat on the exchange. He got to ring the opening bell at the NYSE today and a well deserved privilege. Congratulations Art!


In stock news Apple shares declined after ABI Research said iPad 2014 sales were expected to decline for the first time in the five-year history of the tablet. The forecast is for sales of 68 million units down from 74 million in 2013. Typically Apple gets 35% of its iPad sales in Q4 and the research firm expects sales in Q4 to lag estimates.

ABI also expects Amazon, Barnes & Noble and Google to also post lower tablet sales. Meanwhile Samsung is expected to post a gain with 43 million in sales compared to 38 million in 2013. Also expected to post gains are Acer, ASUS, Dell, HP, Lenovo, LG and Microsoft. Android tablets are expected to garner a 54% share of the branded tablet market with iOS at 41% and Windows 8 at 5%. ABI expects the overall sales of tablets to rise +16% in 2015 to 194 million and rising to 290 million in sales for 2019.

In the seven days leading up to Christmas 11% of new device activations were full size tablets and 11% for small tablets. The company said the larger iPhone six was impacting iPad sales.


Microsoft (MSFT) is said to be working on a stripped down browser to compete with Google's Chrome. Code-named Spartan, the new browser will look more like Firefox and Chrome and will support extensions. Internet Explorer may have helped pioneer the Internet back in the 1990s but it has grown to be big, bulky and slow compared to its competitors and it does not play well with mobile devices. Spartan will be bundled with Windows 10 according to ZDNet. Desktop users will receive IE 11 and Spartan. Chrome recently took over the top spot in the browser rankings with a 6% gain to 31.8%. IE dropped -6% to 30.9%. Apple's Safari holds a 25% share.


There is a dark side to cheap gasoline. Prices have collapsed so fast that a barrel of gasoline cost $50.40 on the spot market ($1.20 gallon) and the price of oil was $54. That means refiners would lose money refining gasoline today if it were not for the other products that are refined from the same barrel of oil. Diesel cost $78.54 per 42 gallon barrel or $1.87 a gallon. The oil glut has turned into a gasoline glut with gasoline futures hitting a 5-year low at $1.45 on Tuesday. Some analysts are now predicting a national average for gasoline under $2.00 while others are forecasting $2.13 to $2.19. These numbers will not last long if refiners can't make a profit. They are not going to refine gasoline for a loss. That will shrink supply and prices will rise. Last week the EIA reported a record output of 9.92 mbpd for refined gasoline. With diesel and jet fuel prices finally dropping we should see refiners back off from the 93.5% utilization factor we saw over the last two weeks.


Researchers believe they have discovered patient zero in the Ebola outbreak. The source was a 2-year-old boy in Meliandou, Guinea. He played in a tree that was a nesting place for bats. Researchers theorize he contacted the disease from the bat droppings and died in December 2013. His family became infected from him and spread that infection throughout his village and on to Liberia, Sierra Leone, Nigeria, Mali and Senegal. So far more than 20,000 people have been infected and more than 8,000 have died. If only the parents and child had practiced basic safety methods like frequent hand washing the outcome may have been significantly different.

Market

Remember last week when the market was setting new highs? Investors poured more money into U.S. based equity funds at a record rate. Mutual funds and exchange traded funds (ETFs) saw their biggest weekly inflows ever. According to Thomson Reuters U.S. funds took in more than $36.5 billion last week. That is in addition to $81.3 billion that has flowed into ETFs since October. According to TrimTabs.com that is the largest three-month inflow ever. According to ETF.com the S&P tracking ETF (SPY) received $27.3 billion of that total.

Very large inflows are negative on a contrarian basis. That means everyone is "all in" at a market top. Of course there will be more inflows this week and next as retirement contributions and year-end bonuses are put to work. That typically supports the market into the January option expiration cycle.

The S&P gave back -10 points to close at 2,080 with one trading day left in 2014. With 2,100 the unofficial target for the end of 2014 it would take a very bullish day on Wednesday to hit that target. With the S&P up +12.5% for the year it would also take a huge market drop to take us back to single digit gains.

The tax sellers should be done but given the rebound off the December lows we could still see some additional profit taking. If you don't have a specific reason to be in the market I would probably pass on adding new positions until next week. I still remember January 2008. The last three days of December posted losses and January 2nd started a -130 point S&P decline by January 22nd. The market was strongly directional to the downside but 2008 was a different time and the beginning of the financial crisis. We can't really compare that January with expectations for this January but it does make me cautious.

My official outlook is for further gains in early January and then some serious profit taking after option expiration. Whether that comes true or not remains to be seen.

The 2,080 level is initial support on the S&P so there is the potential for a rebound on Wednesday. A further decline could spoil hopes for a strong start to 2015 on Friday.


The Dow continued its pattern of weakness that started last week. The intraday shadows on those candles from last week predicted a future decline. The Dow weakness today was led by Caterpillar but it was broad based with only four companies finishing in the green. However, there were no big losses. This appeared to be simple profit taking rather than some change in direction.

The Dow closed back below 18,000 but still above three uptrend lines of resistance, which should now be support. I am neutral on the Dow fundamentally but the +1,034 point rebound from 17,069 on December 17th to the 18,103 high on December 26th is begging for some profit taking. The Dow should not rebound 1,034 points in 7 trading days without a decent retracement of some of those gains.



The Nasdaq Composite declined to close below prior resistance at 4,800 but still above uptrend support at 4,770. This could aid in producing a rebound on Wednesday but I am cautious we could see further choppy trading. I would not rush into Nasdaq stocks or any stocks for that matter until next week and then only after seeing how the market begins 2015.



There is no reason to rush into the market on Wednesday. Don't let your early celebration of New Years Eve trick you into making trades while under the influence of a high blood alcohol content. Enjoy your parties and plan to take a sober look at the market on Monday.

 

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Enter passively, exit aggressively!

Jim Brown

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New Plays

Vowing To Lose Weight In 2015?

by James Brown

Click here to email James Brown


NEW BULLISH Plays

GNC Holdings - GNC - close: 46.88 change: +0.33

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
GNC is part of the services sector. According to the company, "GNC Holdings, Inc., headquartered in Pittsburgh, PA, is a leading global specialty retailer of health and wellness products - including vitamins, minerals, and herbal supplement products, sports nutrition products and diet products."

Currently GNC has over 8,800 locations with more than 6,500 of them inside the United States. Overall they have sales in over 50 countries. That is part of the upside. GNC has a lot of opportunity to grow overseas.

It seems like all the bad news is priced in for GNC. The stock is down -20% in 2014. That's after we factor in the $16 bounce from its July-August lows near $30.84 (that's a +52% bounce from its 2014 low). The company has been struggling with too much inventory and slower sales. In February and July this year they missed Wall Street's earnings estimates and GNC management lowered their 2014 guidance. After analysts finally lowered the bar enough GNC beat estimates by a penny when they last reported earnings in October. Analysts at Goldman Sachs believe that GNC's new CEO Mike Archbold will be successful in turning the company around and growing GNC's gross margins.

Someone is buying the bullish case for GNC as shares have developed a bullish trend of higher lows and higher highs. Technically the 50-dma crossed up through its 200-dma a few weeks ago, which is a bullish longer-term signal. GNC has managed to chew through a ton of overhead resistance and the point & figure chart is bullish with a $62 target.

GNC could benefit from a seasonal bias. 2015 begins this week. Millions of people will be making their New Year's resolutions. How many people are vowing to lose weight and be more active this year? That could give GNC a boost in the first quarter.

GNC has been consolidating just below short-term resistance at $47.00 the last few days. Tonight we're suggesting a trigger to launch bullish positions at $47.15. Plan on exiting prior to GNC's next earnings report in mid February.

NOTE: I am suggesting small positions to limit risk.

Trigger @ $47.15 *small positions*

- Suggested Positions -

Buy GNC stock @ (trigger)

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

Buy the FEB $50 CALL (GNC150220C50) current ask $1.30

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

Intraday Chart:

Daily Chart:



In Play Updates and Reviews

Widespread Profit Taking

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market endured widespread profit taking on Tuesday. Fortunately the pullback was relatively mild.


Current Portfolio:


BULLISH Play Updates

Freescale Semiconductor - FSL - close: 25.53 change: +0.01

Stop Loss: 24.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Comments:
12/30/14: FSL delivered its fifth day of consolidating sideways. Shares are hovering just below resistance near the $26.00 level. We are suggesting a trigger to open bullish positions at $26.15.

Earlier Comments: December 27, 2014:
Headquartered in Austin, Texas, FSL has operations in more than 20 countries. According to the company, "Freescale Semiconductor (FSL) is a global leader in embedded processing solutions, providing industry-leading products that are advancing the automotive, consumer, industrial and networking markets. From microprocessors and microcontrollers to sensors, analog integrated circuits and connectivity – our technologies are the foundation for the innovations that make our world greener, safer, healthier and more connected. Some of our key applications and end-markets include automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy management, portable medical devices, consumer appliances and smart mobile devices."

FSL has beaten Wall Street's earnings estimates every quarter this year. Back in October they beat estimates by seven cents. FSL's CEO Gregg Lowe said, "Each of our five product groups has grown at double digit rates so far in 2014, and we are well positioned to continue gaining market share." Unfortunately management also lowered their Q4 revenue guidance into the $1.075 billion to $1.13 billion range. That was below Wall Street's estimate of $1.18 billion. The good news is that investors don't seem to care. Shares of FSL have been soaring from their October lows.

A couple of weeks ago Bernstein Research upgraded FSL and raised their price target from $11 to $31 a share. Forbes also ran a bullish article on FSL. According to the Forbes author FSL is extremely well positioned to take advantage of the growing use of semiconductors in automobiles. FSL is the number two player in automotive chips with 22 percent of the market. Right now every car built in the world averages about 29 semiconductor chips and six of them are from FSL. That means FSL averages about $13.75 in sales per car, globally. The Forbes article also noted that automotive semiconductor sales are expected to grow +10.8 percent over the next three years. That's 50 percent more than communication chips, which is the next fastest growing segment.

The relative strength in FSL is impressive. The stock is up significantly from its October lows. Yet after the mid-December consolidation FSL does not look quite so overbought. The point & figure chart is bullish and forecasting a long-term target near $44.00.

Today FSL is hovering just below the $26.00 level. This was resistance back in April 2014. A breakout past $26.00 could spark some serious short covering. The most recent data listed short interest at almost 20% of the 107 million share float.

Tonight we are suggesting a trigger to open bullish positions at $26.15. We will plan on exiting prior to the Q4 earnings report due out around the very end of January or early February.

Trigger @ $26.15

- Suggested Positions -

Buy FSL stock @ (trigger)

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

Buy the MAR $25 CALL (FSL150320C25)

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


Sealed Air Corp. - SEE - close: 42.91 change: -0.11

Stop Loss: 41.65
Target(s): To Be Determined
Current Option Gain/Loss: +4.5%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
12/30/14: SEE is seeing some profit taking this week. The stock is down two days in a row. Shares are nearing what should be short-term technical support at the 10-dma. If that fails then the $42.00 mark should also offer some support.

Earlier Comments: December 8, 2014:
SEE is part of the consumer goods sector. They're in the packaging and containers industry. The company describes itself as "Sealed Air is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, Sealed Air offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, Sealed Air generated revenue of $8.1 billion in 2011 and has approximately 26,300 employees who serve customers in 175 countries."

The U.S. economy is improving and that should mean a strong tailwind for SEE. The company has seen earnings growth improve. The last two quarters in a row SEE has beaten Wall Street's estimates on both the top and bottom. If that wasn't good enough they also raised their guidance two quarters in a row.

SEE's most recent earnings report was October 29th. Analysts were expecting a profit of $0.45 a share on revenues of $1.94 billion. SEE said earnings were up +24% from a year ago to $0.52 a share. Revenues rose +3.3% to $1.98 billion.

Jerome A. Peribere, President and Chief Executive Officer of SEE commented on their quarterly performance. He said, "Our financial and operational performance in the third quarter exceeded our expectations across all key metrics. Net sales increased 3.6% on a constant dollar basis, Adjusted EBITDA margin surpassed 15%, and Adjusted EPS increased 24%. Adjusted gross profit margin increased 120 basis points as a result of our continued disciplines and value-added selling approach across all regions and divisions. Despite macro-economic uncertainties, currency headwinds and volume declines in the North American protein market, we are increasing our 2014 outlook for Adjusted EBITDA and Adjusted EPS and expect to generate approximately $540 million in free cash flow."

SEE's new 2014 guidance is $1.70-1.75 a share versus Wall Street's $1.65-1.70 estimate. The stock has been strong following this report. Instead of correcting lower in mid November SEE merely consolidated sideways. Now it's rested and ready to run. Shares are up five days in a row and ignored the market-wide weakness today.

Today's intraday high was $40.87. I am suggesting a trigger at $41.05 to open bullish positions. We're not setting a target tonight but I will note the point & figure chart is forecasting a long-term target of $61.00.

- Suggested Positions -

Long SEE stock @ $41.05

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

Long Jan $40 CALL (SEE150117C40) entry $1.90

12/27/14 new stop @ 41.65
12/22/14 new stop @ 40.85
12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 33.20 change: +0.24

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: + 0.5%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
12/30/14: If you missed SFM hitting our entry point at $33.05 yesterday the stock gave you another chance today. Shares quickly bounced off its morning spike lower to $32.56 and then soared back up to $33. SFM managed to outperform the broader market with a +0.7% gain.

Earlier Comments: December 23, 2014:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike


Market Vectors Semiconductor ETF - SMH - close: 54.84 change: -0.35

Stop Loss: 54.45
Target(s): To Be Determined
Current Option Gain/Loss: - 1.6%
Entry on December 23 at $55.75
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.9 million
New Positions: see below

Comments:
12/30/14: We are growing more defensive on our SMH trade. Friday's move is starting to look like a failed rally at $56.00. The SMH is down three days in a row and today's -0.6% decline left shares below their 10-dma.

I am not suggesting new positions. Tonight we'll raise the stop loss to $54.45.

Earlier Comments: December 22, 2014:
The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index.

The top ten holdings in the ETF are Intel (INTC), Taiwan Semiconductor (TSM), Texas Instruments (TXN), Micron Technology (MU), ASML Holding (ASML), Applied Materials (AMAT), Broadcom Corp. (BRCM), NXP Semiconductor (NXPI), ARM Holdings (ARMH), and Analog Devices, Inc. (ADI).

The semiconductor industry has been outperforming the market most of the year. The NASDAQ composite is up +14% in 2014. The NASDAQ 100 index is up +19%. Yet the SMH is soaring with a +29.8% gain this year. Now after a week and a half correction the up trend looks ready to resume.

Traders bought the dip today near short-term technical support at the 10-dma. The SMH outperformed again with a +1.65% gain on Monday versus the NASDAQ's +0.33% gain. Tonight we are suggesting a trigger to open bullish positions at $55.75.

- Suggested Positions -

Long SMH stock (ETF) @ $55.75

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

Long MAR $57 CALL (SMH150320C57) entry $1.60

12/30/14 new stop @ 54.45
12/23/14 triggered @ 55.75
Option Format: symbol-year-month-day-call-strike


Sierra Wireless Inc. - SWIR - close: 47.83 change: -0.55

Stop Loss: 43.90
Target(s): To Be Determined
Current Option Gain/Loss: +11.6%
Entry on December 22 at $42.85
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 861 thousand
New Positions: see below

Comments:
12/30/14: Today's drop in SWIR (-1.1%) snapped a seven-day winning streak. The stock has been very strong but SWIR is short-term overbought and due for a dip. More conservative investors may want to lock in gains now or move their stop higher. Currently our stop is at $43.90.

I am not suggesting new positions at this time.

Earlier Comments: December 20, 2014:
The Internet of Things (IoT) is going to be huge. Depending on who is making the forecast the size of just how huge it can become is staggering. Last year (2013) there were an estimated 300 million embedded connected devices in the IoT. IDC is estimating that could reach 15 billion connected devices by 2015. Cisco Systems (CSCO) is forecasting 25 billion devices connected to the Internet of Things by 2015 and 50 billion by 2020. Intel is forecasting up to 200 billion connected devices by 2020.

The backbone of the IoT is M2M communication. That's machine-to-machine communication. SWIR is the market leader with 34% of the market for cellular M2M embedded module market. According to the company marketing material, " Sierra Wireless is the global leader in machine-to-machine (M2M) devices and cloud services, delivering intelligent wireless solutions that simplify the connected world. We offer the industry's most comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, seamlessly integrated with our secure M2M cloud services. Customers worldwide, including OEMs, enterprises, and mobile network operators, trust our innovative solutions to get their connected products and services to market faster. Sierra Wireless has more than 900 employees globally and has R&D centers in North America, Europe and Asia." They make products for a wide array of industries including: automotive, transportation, industrial and infrastructure, security, field service, healthcare, consumer, energy, sales and payments, and networking.

Earnings have been improving. Back in July they reported their Q2 results that beat Wall Street's estimates on both the top and bottom line and management guided higher. SWIR announced their Q3 results on November 5th. Even after guiding higher the prior quarter they still beat estimates. Analysts were expecting a profit of $0.13 per share on revenues of $138.7 million. SWIR delivered $0.24 with revenues up +27.6% from a year ago to $143.3 million. That's a record quarter for revenue and up +6% from the prior quarter. Organic revenue growth was up +18.8%. Looking at the details of the quarter SWIR said their non-GAAP earnings were up +249% from a year ago.

SWIR raised their guidance again for the fourth quarter of 2014. They now expect EPS in the $0.25-0.28 range with revenues in the $145-148 million area. That's about +23% growth from a year ago. Analysts were only forecasting $0.17 per share on revenues of $142 million.

With this big surge in earnings and revenue growth it's not a surprise to see the stock outperforming. SWIR is up +74.5% in 2014 versus the NASDAQ's +14% gain. The point & figure chart for SWIR is forecasting a target near $53.

With a market cap around $1 billion I wouldn't be surprised if someone acquires SWIR, but that's pure speculation on my part. They have about $200 million in cash and no debt.

This past week saw shares of SWIR rally past resistance near $42.00 and close at multi-year highs. Tonight we are suggesting a trigger to open bullish positions at $42.85.

- Suggested Positions -

Long SWIR stock @ $42.85

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

Long MAR $45 CALL (SWIR150320C45) entry $3.60

12/27/14 new stop @ 43.90
12/22/14 new stop @ 41.35
12/22/14 triggered on gap higher at $42.85, trigger was $42.85
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Zulily, Inc. - ZU - close: 23.02 change: +0.62

Stop Loss: 24.45
Target(s): To Be Determined
Current Option Gain/Loss: +11.1%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/30/14: ZU displayed significant relative strength today with a +2.7% gain. Today's bounce should be viewed in the context of yesterday's breakdown to new all-time lows. If this bounce continues then ZU could rally toward short-term resistance at its 10-dma near $24.00.

I am not suggesting new positions at this time.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
12/18/14 new stop @ 26.05
12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike