Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/27/2015

Table of Contents

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

Market Wrap

Strong Dollar Storm

by Jim Brown

Click here to email Jim Brown

While traders were taking cover from the Juno blizzard the market was floundering under a storm of high profile earnings reports blaming the strong dollar for missing estimates. Add in a huge decline in durable goods orders and the Dow dropped -394 at the open to retest the 17,300 support level.

Market Statistics

The Nasdaq lost -112 or -2.3% at the open and the S&P declined -37 or -1.8%. While winter storm Juno failed to blanket the Northeast with the 2-3 feet of snow that was predicted the impact of the strong dollar on earnings has been worse than most analysts expected.

The biggest blow to the market was actually the Durable Goods report for December. Orders declined -3.4% for the fourth decline in the last five months. Over the last five months durable goods orders have declined an average of -4.84% per month. That is also caused by the strong dollar reducing demand for American products.

However, the December report was impacted significantly by a 55.5% decline in nondefense aircraft orders. New orders excluding aircraft still fell -0.8% while nondefense orders fell -3.2%. Orders for defense aircraft and parts fell -19.9%. Unfilled orders declined -0.8% and the first drop in seven months. New orders declined across all segments so the weakness was not just in aircraft.

Consensus estimates for the headline number were for a +0.5% gain so this decline was a big surprise. This will negatively impact the Q4 GDP and likely reduce it into the high 2% growth range, down from 4.97% in Q3.

The Richmond Fed Manufacturing Survey headline number declined from 7 to 6 for January. This is down from 20 in October. The decline was driven by the employment component that declined from 13 to 5, an 8 point drop. Backorders declined for the third month falling from -5 to -9. The new orders component was flat at 4 and relatively anemic. Prices paid declined from an annualized rate of +1.26% in December to only +0.7% in January. Prices received declined from +0.83% to +0.53%. There is no inflation in the manufacturing sector.

The separate services survey rose sharply from 3.0 to 14.0 on the headline number. This was the first gain in three months. The retail revenues component rose from 10 to 25 with services revenues rebounding from 2 to 12. The six-month demand expectations rose from 13 to 17 suggesting companies are optimistic about the future.


The Texas Services Sector Outlook Survey went the opposite direction. The headline number fell from 12.7 to -2.8 for January. That is the fifth consecutive month of declines from the high of 27.7 in September. This was the lowest reading in 11 months and the first negative reading in the last three years. All the components declined with employment falling from 14.3 to 5.8, revenue from 22.2 to 12.1, hours worked from 7.2 to 1.3, wages and benefits from 17.0 to 13.5, selling prices from 6.9 to 2.8 and input prices from 19.9 to 11.4. Since Texas has been a leader in the U.S. economic growth the sharp decline over the last several months suggests the U.S. economy is weakening.

The only positive report for today was Consumer Confidence, which soared from 92.6 to 102.9 and the highest level since August 2007. Obviously the falling gasoline prices are the prime driver of confidence. The present conditions component exploded higher from 99.9 to 112.6 and the expectations component rose from 88.5 to 96.4.

For some reason the burst in confidence did not carry over into consumer buying plans. The percentage of respondents planning on buying a car rose from 12.2% to 13.0% while those planning on buying an appliance/TV shrank from 51.9% to 43.6%. Prospective home buyers declined slightly from 4.9% to 4.8%.


The calendar for Wednesday is highlighted by the FOMC statement and the Fed's take on the recent economic events, strong dollar and worries from overseas. Morgan Stanley pushed their expected date for the first rate hike out to March 2016 and others are now targeting Q4 2015. The consensus is now July but moving farther away at a steady pace.

The GDP estimate for Friday's report has not changed officially but the number of analysts expecting a sub 3% growth number is growing. This could be market negative if the number comes in much lower.

Next week we have the ISM Manufacturing report and estimates are falling. We also have the payroll numbers that could reflect the sharp decline in workers in the energy sector plus the final layoffs from the temporary holiday workers.


The market was crushed this morning by multiple earnings misses and lowered guidance from blue chip companies. Dow component Caterpillar (CAT) fell more than $6 (about 45 Dow points) after reporting earnings of $1.23 compared to estimates for $1.55. The company also guided a lot lower for 2015 because of the impact of the crash in oil prices, mined commodities and the impact of the strong dollar. Caterpillar now expects to earn $4.60-$4.75 in 2015 compared to analyst estimates for $6.67. That is a monster guidance warning. Revenues are expected to be -9% below 2014 levels.

I warned several weeks ago to expect some ugly earnings from CAT and everyone else that depends on the energy sector and overseas sales for their revenue. Although CAT shares declined to multi-year support I would not be a buyer today.


Dow component Pfizer (PFE) went against the flow at the open with decent spike despite some lackluster earnings and warnings about the strong dollar. Earnings of 54 cents beat the street by a penny but warnings about falling revenue on patent expirations and currency issues overseas blunted the good news. Prescription drug sales declined -3%. Helping to lift shares was an announcement they would return $13 billion to shareholders in 2015 through $6 billion in share buybacks and $7 billion in dividends. This compares to $11 billion in 2014. The company is sitting on $33 billion in cash and said it is in search of an acquisition.


Dow component Procter & Gamble (PG) saw its shares decline -3.5% after it reported a -4% decline in revenue and -8% decline in earnings as a result of the strong dollar impacting overseas sales. The company said it had experienced "unprecedented currency devaluations where virtually every currency in the world devalued versus the dollar." P&G warned that 2015 revenues would be down -5% and net earnings -12% or at least $1.4 billion after taxes because of the dollar.


Dow component Microsoft (MSFT) dropped -9.2% after reporting disappointing earnings and guidance on Monday night. This decline was responsible for about -30 Dow points. The company said PC sales were expected to decline because of the strong dollar and software sales overseas were being affected. They projected an 8% decline in 2015 earnings.

On Tuesday no less than six analysts downgraded Microsoft for multiple reasons and that pushed the stock down even more than the -$2 it lost in afterhours on Monday.


Dow component Dupont (DD) fell more than $2 at the open after reporting earnings of 71 cents that were in line with estimates. However, revenue declined -4.8% to $7.38 billion because of the strong dollar. The company issued weak guidance for 2015 so the same reason. Earnings are now expected to be $4.00-$4.20 and analysts were expecting $4.47.


Polaris Industries (PII) posted earnings of $1.98 compared to estimates of $1.95. Revenue of $1.27 billion also beat estimates. The company guided lower for 2015 with earnings of $7.22-$7.42 and well under analyst estimates for $7.81. The company blamed the strong dollar for falling small vehicle sales in Europe. Polaris shares spiked +5% on the news.


Other companies that are very dependent on overseas sales and will see further weakness because of the dollar include Avon Products (AVP), which only gets 15% of its sales from the USA. Coach (COH) gets 20% of its sales from Japan. PepsiCo's (PEP) second largest market after the USA is Russia and the ruble declined -6.6% to a new record low on Monday alone. Competitor Coke (KO) only gets half its sales from the USA. Tiffany (TIF) gets 40% of its sales from overseas.

After the bell Apple (AAPL) blew the doors off earnings estimates by selling 74.5 million iPhones. The average estimate was 64.9 million units. Earnings were $3.06 per share, easily beating estimates of $2.60 per share. Net earnings were $13.072 billion and just shy of the record of $13.078 billion set in Q1-2013. Revenue of $74.6 billion easily beat estimates of $67.5 billion. CEO Tim Cook said demand for Apple products soared to "an all time high."

Apple guided for revenue of $52-$55 billion for Q2, up from $46.5 billion in the year ago quarter. Analysts were expecting $53.7 billion so that was in line with estimates. Gross margins should rise slightly to about 39%.

Apple said the impact of the dollar was reduced by a comprehensive hedging program.

iPad sales declined for the fourth quarter with an -18% drop to 21.4 million units. Mac sales rose +14% to 5.5 million units. The company said the Apple Watch will ship in April. Apple is now holding $178 billion in cash. That is enough to buy Google.

Apple shares declined -$4 in regular trading to close at $109. After the earnings shares rallied to resistance at $115 in afterhours.


Yahoo (YHOO) reported earnings of 30 cents which beat estimates of 29 cents. Revenue of $1.18 billion matched street estimates. However, Yahoo earnings were not the big news. Yahoo announced a tax free spinoff of Yahoo's 384 million Alibaba shares into a separate entity. This will avoid billions in taxes and was cheered by investors after the close with Yahoo shares rising +7% to $52 after the close. The new entity will be called SpinCo. The split is expected to occur in Q4 after the 12 month lockup of Alibaba shares expires. It will require approval by the IRS and SEC. The Alibaba stake is worth $39 billion today. Yahoo will retain its 36% in Yahoo Japan, currently worth $7 billion.


Companies on tap for earnings on Wednesday include Dow component Boeing, Facebook, Qualcomm. Expect more of the same with warnings about the strong dollar.


Crude oil rallied +2% today despite the down market and energy stocks bucked the market decline. However, the 2% gain on WTI intraday barely registered on the chart. The rally was short lived with WTI declining -75 cents after the close to $45.51. No bottom yet but that $45 level is getting a lot of traffic.


There is a huge argument in progress in the analyst community about the impact of the oil crash on the economy. Everyone agrees that lower gasoline prices will be very stimulative for consumer spending. However, the sharp decline in spending by energy companies and the large number of job losses is going to weigh on the economy. The argument in the analyst community is based on how much this will impact the economy. Some believe it will be negligible and others are thinking as much as -1% on GDP because of the relationship factors from other sectors dependent on energy spending.

We won't know the real impact for another 3-6 months because current projects/drilling has been budgeted and contracted for months. Until those existing commitments expire we won't see the real impact of the oil decline. If oil prices do find a bottom here in the $45 level and begin to climb into the high demand summer driving season then budgets may not be trimmed as much as expected and the economic impact muted.

Gasoline prices rose today to end the record streak of consecutive declines at 120 days. That is the longest streak since records were started 15 years ago. Gasoline prices rose to $2.038 per gallon, up from $2.033 on Monday. That is still 40% less than the same week in 2014.

Markets

The gains in Apple and Yahoo spiked the futures after the close and they are holding at +4 points at 7:30 ET. After a big market decline like we had today we could expect some dip buyers to appear but they may be traumatized by the nearly -400 point Dow decline at the open. The intraday rebound failed and if the market had been open another 30 minutes we could have closed back on the lows.

The S&P failed at the 2,064 level I highlighted in the weekend commentary and dipped all the way back to 2,020 intraday today before rebounding to close at 2,029. The rebound was lackluster and the selling into the close suggests we could see further declines ahead. The 150-day average has been support since the December decline and it now at 1,995. That is the level we should key on for any future decline. The 2,000 level is psychological and we saw earlier in the month the selling overshot that level somewhat. If we test that again and 1,995 fails we could be looking at another decline like we saw in October.

There is zero chance that we will not see additional earnings misses and lowered guidance because of the strong dollar. However, that excuse will eventually be ignored. I just don't expect it this week.

The analyst estimates for S&P earnings are dropping like a rock and I would not be surprised to see estimates under $120 soon and earnings growth for Q4 to turn negative. That will be a serious drag on the markets and we need to prepare for that event.


Much of the market decline today was Dow related. The number of Dow stocks losing large amounts simply overpowered the index. The declines in the S&P were not as severe and the declines in the Russell 2000 and Russell Microcaps were minimal at roughly .5% and .3%. It was a big cap decline. The small caps have very little exposure to currency issues since sales are mostly in the USA.

The Dow declined to uptrend support at 17,300 and just above the earlier January declines. The number to watch here is 17,275, which allows for a small overshoot to the downside. Resistance is 17,800.



The Nasdaq was weak in part because of Apple earnings fears. Apple shares declined -$4 in regular trading and Apple is 12% of the Nasdaq 100. That suggests the Nasdaq should open higher with the Nasdaq futures up +26 late Tuesday. Qualcomm will weigh on the Nasdaq at the close tomorrow because 90% of their revenue comes from overseas. They are likely to report serious currency issues if they have not adequately hedged against the soaring dollar.

The challenge for the Nasdaq will be Apple. The big event is over and once the shorts cover there may not be enough buyers left to push it higher.

Support on the Nasdaq is 4,650 and resistance well above at 4,770.



The Russell 2000 declined -6 points and remains very close to resistance at 1,200. This was a strong showing given the big decline in the Dow. The Russell Microcap ($RUMIC) only lost -1.5 points. This is critical since the micro caps are inherently risky and fund managers are careful about loading up on these small companies. I view this as a bullish signal. That does not mean the Russell indexes are going to charge higher but it does suggest the broader market is not as negative as it appears on the surface.



Despite the big gains by Apple and Yahoo I continue to have a neutral bias for the market. Until the negative reaction fades to the dollar impact on earnings we are going to have a lot more stocks moving lower after they report. The FOMC announcement on Wednesday should be market positive because the prospect for rate hikes should slide farther into the future. The GDP on Friday could be a problem if it shows a larger than expected decline. The combination of all these events plus the increase in violence in the Ukraine and headlines from Greece could weigh on investor sentiment.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Plays

A Two-Edged Sword

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Virgin America Inc. - VA - close: 37.03 change: +0.08

Stop Loss: 38.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 27, 2015
Time Frame: 2 to 4 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
The IPO honeymoon period for shares of VA might be ending soon. The company's stock hit the market on November 13th with about 13.3 million shares priced at $23.00 each. VA opened at $27.00 and rallied to $30.00 on its first day of trading. Six weeks later VA was testing the $40.00 level.

According to the company's marketing material, "Virgin America is a California-based airline that is on a mission to make flying good again, with brand new planes, attractive fares, top-notch service, and a host of fun, innovative amenities that are reinventing domestic air travel. The Virgin America experience is unlike any other in the skies, featuring mood-lit cabins with fleetwide WiFi, custom-designed leather seats, power outlets, and a video touch-screen at every seatback offering guests on-demand menus and countless entertainment options." VA currently has a fleet of more than 50 Airbus single-aisle planes.

Airline stocks have been big winners the last year and a half. The rally in airline stocks off the group's 2014 October low has been exacerbated by plunging oil prices. Jet fuel is a huge expense for this industry so falling oil is a significant tailwind toward company profits.

Many airlines to try reduce their risk of jet fuel price volatility with fuel hedges. The use of hedges can be a two-edged sword and that appears to be cutting into VA's profits. The company confessed last week that its fuel hedges are killing its margins. Today the spot price for jet fuel is around $1.60 a gallon. VA is locked into prices in the $2.48-2.75 for 66 percent of its fuel needs for the current quarter.

VA also announced they raised their employee pay, which will likely hurt margins as well.

Shares are down sharply on this news although VA managed a bounce today. The point & figure chart has already turned bearish and is forecasting at $32 target.

The intraday low today was $36.76. We are suggesting a trigger to open bearish positions at $36.45. However, more conservative traders may want to wait for VA to break the trend line of higher lows (see chart) before initiating positions.

Please note that this could be a short-term trade. VA has not confirmed its earnings date yet but I suspect they will announce in February. We'll try to avoid holding over their earnings announcement. When that information becomes available we'll adjust our time frame.

Trigger @ $36.45

- Suggested Positions -

Short VA stock @ (trigger)

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

Buy the FEB $35 PUT (VA150320P35) current ask $1.50

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

Daily Chart:



In Play Updates and Reviews

Big Caps Suffer A Storm Of Declines

by James Brown

Click here to email James Brown

Editor's Note:
The "historic" blizzard to hit New York was a dud. That didn't stop Wall Street from seeing a blizzard of declines. Disappointing earnings headlines fueled a sharp sell-off this morning.


Current Portfolio:


BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 51.59 change: -0.01

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: +1.0%
Entry on January 23 at $51.10
Listed on January 22, 2015
Time Frame: Exit PRIOR to earnings in mid March
Average Daily Volume = 830 thousand
New Positions: see below

Comments:
01/27/15: BURL spiked lower this morning thanks to the market's broad-based weakness. Fortunately shares bounced back and managed to close virtually unchanged on the session. I would still consider new positions at current levels.

Earlier Comments: January 22, 2015
One of the best performing stocks last year was BURL. The stock gained +47% in 2014 versus the S&P 500's +11% gain.

According to the company website, "Burlington is a national off-price apparel, home and baby products retailer, operating in the United States and Puerto Rico. We offer great value to our customers by featuring high-quality, primarily branded apparel, home and baby products at "Every Day Low Prices", to deliver savings of up to 60-70% off department and specialty store regular prices. We operate more than 500 stores under the Burlington Coat Factory, Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes nameplates."

The company has been on a roll and is poised to see earnings grow +100% in its current fiscal year. Management has been consistently raising estimates. Back in September they reported earnings that beat estimates on both the top and bottom line and raised their full year guidance. They beat again with their earnings report in December and raised guidance. Then on January 9th they raised guidance again. We are starting to see Wall Street analysts raise their price targets for BURL into the $58-60 zone.

Investors have been consistently buying the dips. Now shares are in the process of breaking out past round-number, psychological resistance at the $50.00 level. Tuesday's high was $50.90. Tonight I am suggesting a trigger to open bullish positions at $51.10.

- Suggested Positions -

Long BURL stock @ $51.10

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

Long MAR $55 CALL (BURL150320C55) entry $1.87

01/23/15 triggered @ 51.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 36.75 change: -0.13

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: +11.2%
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:
01/27/15: SFM held up pretty well. Traders bought the dip before SFM hit $36.00 and shares pared its loss to just 13 cents.

I am not suggesting new positions at this time.

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

01/24/15 new stop @ 34.85
01/15/15 new stop @ 33.45
12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike


Tekmira Pharmaceuticals - TKMR - close: 26.26 change: +0.74

Stop Loss: 22.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.6%
Entry on January 27 at $26.10
Listed on January 26, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
01/27/15: Our brand new play on TKMR is open. The stock was not immune to the market's weakness this morning. Traders bought the dip and TKMR soared to a new relative high and outperformed the market with a +2.8% gain. Our suggested entry point for bullish positions was hit at $26.10.

Earlier Comments: January 26, 2015:
Biotech stocks were strong performers last year. They have continued to rally in 2015. One biotech that is outpacing its peers this year is TKMR.

The company made a lot of headlines last year with its experimental treatments for Ebola. According to the company, "Tekmira Pharmaceuticals Corporation is a biopharmaceutical company focused on advancing novel RNAi therapeutics and providing its leading lipid nanoparticle (LNP) delivery technology to pharmaceutical and biotechnology partners. Tekmira has been working in the field of nucleic acid delivery for over a decade, and has broad intellectual property covering its delivery technology."

The Ebola panic has faded but TKMR is still working on a treatment. The company's TKM-Ebola treatment is in phase-one clinical trials thanks to a $140 million deal with the U.S. Defense Department.

Ebola is not driving the rally in TKMR this year. TKMR's recent strength is thanks to M&A news. On Sunday, January 11th the company announced they were merging with OnCore Biopharma. According to the press release, TKMR "and OnCore Biopharma, Inc., a biopharmaceutical company dedicated to discovering, developing and commercializing an all-oral cure for patients suffering from chronic hepatitis B virus (HBV) infection, announced today that they have agreed to merge to create a new leading global HBV company focused on developing a curative regimen for hepatitis B patients by combining multiple therapeutic approaches."

Why is this significant? Hepatitis B affects a lot of people. TKMR's press release discussed the disease saying, "Hepatitis B is a serious infection of the liver caused by the hepatitis B virus (HBV) and is considered a major global health problem. Hepatitis B infection can cause chronic liver disease, which increases a patient's risk of death from liver cirrhosis and liver cancer. Estimates from the Centers for Disease Control and Prevention (CDC) indicate that up to 350 million people globally may be chronically infected with hepatitis B and, according to the World Health Organization (WHO), more than 780,000 people die every year due to hepatitis B. Most currently available therapies aim to suppress this viral infection but do not lead to a cure in the overwhelming majority of patients."

The stock market applauded the merger news and shares of TKMR soared +57% on Monday, January 12th. I'm sure a lot of that was short covering. The most recent data listed short interest at almost 10% of the 21.1 million share float. I suspect that data is out of date today.

It is interest how TKMR has not seen that much profit taking after such a big move. Traders have been buying the dips the last several days. Now TKMR is hitting new three-month highs. Shares look poised to rally toward resistance near $30.00.

Tonight we are suggesting a trigger to launch bullish positions at $26.10. I want to caution readers that biotech stocks are always a higher-risk, more aggressive trade. The right or wrong headline can send a biotech stock crashing or soaring overnight and TKMR is a perfect example with the move on January 12th. I am suggesting small positions to limit risk. You may want to consider call options as another way to limit your risk.

*small positions* - Suggested Positions -

Long TKMR stock @ $26.10

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

Long MAR $27.50 CALL (TKMR150320C27.50) entry $1.60

01/27/15 triggered @ 26.10
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Discovery Communications - DISCA - close: 30.05 change: -0.01

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +1.7%
Entry on January 14 at $30.57
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: see below

Comments:
01/27/15: DISCA didn't move much today. Shares recovered from the morning gap down but the bounce struggled with resistance near $30.00. Bulls could argue that DISCA's ability to close virtually unchanged while the major indices sank is a show of relative strength. That's a potential warning signal for us.

I am not suggesting new positions tonight. More conservative investors might want to tighten their stop loss.

Earlier Comments: January 13, 2015:
We have heard for a long time that content is king. Discovery has some great content. So why is the stock suffering so poorly? The stock market posted double-digit gains last year and yet shares of DISCA was one of the market's worst performers with a -23.8% decline.

According to company marketing materials, "Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the world's #1 pay-TV programmer reaching nearly 3 billion cumulative subscribers in more than 220 countries and territories. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. Discovery also controls Eurosport International, a premier sports entertainment group, including six pay-TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks."

It looks like the revenue picture has soured for DISCA. Back in February 2014 the company reported earnings and raised their revenue guidance. One quarter later, when they reported in July, they lowered the top end of their guidance. Then in November, when they reported earnings, DISCA missed Wall Street's revenue estimate and management lowered their revenue guidance.

In a recent interview Discovery's CEO said they are having trouble monetizing all of their content. The advertising environment has gone soft and they haven't figured out why there is a lull in ad spending.

Research is forecasting that online video watching will more than double by 2020. A USB analyst believes online will eventually pose a significant threat to more traditional TV watching trends and companies. Another analyst, this time with Sanford Bernstein, believes the huge declines in TV viewership will continue. Analyst Todd Juenger said, "We believe ad-supported TV is in the early stages of a structural decline." That's long-term bearish for TV. DISCA needs to do a better job of monetizing their content online.

Technically DISCA looks very bearish. The oversold bounce from November stalled in the $36 area several time. The point & figure chart is bearish and forecasting at $23.00 price target. Today DISCA is breaking down to new 52-week lows.

We are suggesting a trigger to open bearish positions at $30.90. Plan on exiting ahead of DISCA's earnings report in mid February.

- Suggested Positions -

Short DISCA stock @ $30.57

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

Long FEB $30 PUT (DISCA150220P30) entry $1.20

01/15/15 new stop @ 30.85
01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike


Greif, Inc. - GEF - close: 39.97 change: +0.09

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Entry on January 26 at $39.94
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: see below

Comments:
01/27/15: GEF also displayed relative strength. The stock bounced from its gap down this morning and rallied back toward resistance near $40.00. I am suggesting investors wait on launching new positions. Relative strength in a bearish candidate could be a caution signal.

Earlier Comments: January 24, 2015:
Shares of GEF are crumbling like wet cardboard. The company operates in the consumer goods sector. They make packaging and container products. According to a company press release, "Greif is a world leader in industrial packaging products and services. The company produces steel, plastic, fibre, flexible, corrugated and reconditioned containers, intermediate bulk containers, containerboard and packaging accessories, and provides blending, filling, packaging and industrial packaging reconditioning services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 50 countries to serve global as well as regional customers."

Unfortunately for investors GEF did not have a good 2014 on the earnings front. They missed analysts estimates the last four earnings reports in a row. In August 2014 GEF's management guided earnings lower. In December they lowered guidance again.

GEF's most recent earnings report was January 14th and Q4 earnings plunged -90% to $8.7 million. Revenues dropped -4% to $1.05 billion, below Wall Street estimates. For all of 2014 GEF said profits declined -38% and revenue slipped -3%. Once again management guided earnings lower. They now expected 2015 earnings in the $2.25-2.35 range compared to Wall Street estimates of $2.78 a share.

The company's earnings report provided an outlook where management issued this statement:

The company anticipates the overall global economy to reflect a modest recovery in fiscal 2015, with positive aspects of the improving economy in the United States being offset by the negative trends in other regions, particularly in Europe and Latin America. We anticipate that foreign currency matters will continue to present challenges for the company, as the strengthening of the United States dollar against other currencies will continue to impact the company’s revenues and net income.

Following GEF's Q4 results several analyst downgraded their rating on the stock. The point & figure chart is bearish and currently forecasting at $31.00 target.

Technically Friday's display of relative weakness (-2.7%) broke down through significant support near $40.00. We are suggesting bearish positions immediately on Monday morning. More conservative traders may want to wait for a little confirmation (perhaps a decline below $39.25). The nearest support looks like the $35 and $30 regions.

NOTE: GEF does have options but the spreads are too wide to trade.

- Suggested Positions -

Short GEF stock @ $39.94

01/26/15 trade began this morning. GEF opened at $39.94


Lions Gate Entertainment - LGF - close: 29.32 change: +0.01

Stop Loss: 29.65
Target(s): To Be Determined
Current Option Gain/Loss: -1.6%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings on February 5th
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
01/27/15: LGF managed to post another gain. That is the stock's fifth gain in a row. If shares sees any follow through higher tomorrow we could see LGF hit our stop loss at $29.65. I am not suggesting new positions.

Earlier Comments: January 14, 2015:
Everyone loves the movies. While 2014 had some pretty big hits total box office receipts for the industry were $10.3 billion. That's a -5% drop from the 2013. "The Hunger Games: Mockingjay - Part 1" was one of the most successful films last year with a gross of $309 million.

LGF is the studio that makes the Hunger Games movies. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, channel platforms and international distribution and sales. The Company currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses."

In addition to The Hunger Games, LGF also makes the new Divergent films, which could be a big hit although probably not as big as Games. The company has also seen success in television with hits like Mad Men, Nurse Jackie, and Orange is the New Black. However, the stock tend to trade around its movie releases. That could prove challenging.

The last Hunger Games move is now last year's news. Shares of LGF could lack any serious catalyst to move the stock until the next round of movies come out. The next Divergent movie ("Insurgent") is expected to come out in March this year. Meanwhile the Mockingjay - Part 2 doesn't hit theaters until November 2015. If the stock's action is any indication then Wall Street is not very enthusiastic over the next Divergent movie.

Shares failed multiple times in the $35.50 area from mid November through December 1st. This is now a new lower high on the weekly chart (see below). While the broader market rallied in December, shares of LGF were under performing. That underperformance has continued into 2015.

Investors have taken notice of LGF's weakness. The most recent data listed short interest at 18% of the 84 million share float. The point & figure chart has turned bearish and is currently forecasting at $24 target but that could get worse.

Today LGF is about to test support at $29.00. A breakdown there could be our entry point. Tonight we're suggesting a trigger at $28.85.

- Suggested Positions -

Short LGF stock @ $28.85

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

Long FEB $30 PUT (LGF150220P30) entry $2.10

01/26/15 new stop @ 29.65
01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 19.86 change: -0.15

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +23.3%
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:
01/27/15: ZU continues to churn sideways. Shares have been consolidating sideways for about four days in a row. More conservative traders may want to tighten their stop again.

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) -

(option trade was closed on Jan. 16th, 2015)
Jan $25 PUT (ZU150117P25) entry $1.15 exit $4.40 (+282.6%)

01/16/15 planned exit for the January $25 puts
01/15/15 new stop @ 21.65
Prepare to exit the January put option tomorrow morning
01/08/15 new stop @ 23.55
01/03/15 new stop @ 24.10
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