Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/15/2016

Table of Contents

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

Market Wrap

Where was the Pre-Fed Rally?

by Jim Brown

Click here to email Jim Brown

Falling oil prices, negative economics and a head fake by the Bank of Japan combined to kill the historical pre Fed rally.

Market Statistics

The big oil rebound is fading after investors began to realize that Iran was not going to play along unless they got an exemption that allowed them to add 1.4 million barrels to their daily production. The production freeze is beginning to thaw even before an official agreement is reached. With the current month WTI futures scheduled to expire on Monday those still holding longs and hoping for a freeze agreement are going to have to sell.


The Bank of Japan failed to issue new stimulus to push their rates even further into negative territory. The BOJ left rates unchanged but said its assessment of inflation expectations had "weakened recently" which suggests they may increase stimulus again at some point in the future. However, they removed the language from the statement they used last time that warned further rate cuts were possible. This confusion over the potential BOJ moves caused Asian and European markets to decline.


In the U.S. the Retail Sales for February fell -0.1% after a -0.4% decline in January. Unfortunately, January sales were originally thought to have risen +0.2% but were revised to that -0.4% drop in this report. Declines were broad based including auto dealers, electronics and appliance stores, furniture stores, department stores and grocery stores. Sales at gasoline stations declined -4% because of the drop in fuel prices. Gains came from building supply stores, sporting goods stores and restaurants.

Sales compared to February 2015 levels are still showing gains. Sales are up overall +3.1% over the last 12 months. If you exclude autos that declined to +2.1% but if you exclude autos and gasoline it rises to +4.3%. Obviously, that is because falling gasoline prices skew the comparisons. The numbers are also impacted by extreme winter storms in February 2015 that depressed sales and producing an unfair comparison.

The Producer Price Index for February declined -0.2% after a +0.1% rise in January. Prices have declined 5 of the last 7 months. Goods prices declined -0.6%, services were flat at zero and core goods rose +0.1%. The year over year comparison was flat at zero on the headline number with goods prices declining -2.8%. Any version of goods relating to energy was off the scale in comparisons with intermediate unprocessed goods down -16.7% and core goods -25.8% all due to oil price declines.

Analysts believe the decline in inflation has reached a turning point and prices will rise from here. Commodity prices reached a level where it is unprofitable to mine or produce them and that has reduced production quantities and prices will rise. The same is true for oil prices. The rebound may be slow but the bottom in prices is behind us.

The NAHB Housing Market Index came in at 58 for March. That is the same level as February and the lowest level since last May. Buyer traffic rebounded from 39 to 43 and the biggest gain since June. The six-month expectations component declined from 64 to 61.

The biggest economic positive for the day was the NY Empire Manufacturing Survey. The headline number for March came in at +0.6 compared to estimates for -10.0 and the February reading of -16.6. That was the largest monthly gain in five years. That is the first positive reading for the headline number since July with a -19.4 reading as the low in January.

New orders rose from -11.6 to +9.6 and backorders rose slightly from -6.9 to -4.0. Employment declined slightly from -1.0 to -2.0. Analysts claim global recession fears appear to be fading despite continued weak economic growth. Also, the strong job gains in February have improved sentiment after the sharp drop in January that was also revised higher.


The two big events remaining for the week are the FOMC decision and press conference on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The Fed is the most important because of their guidance for the June meeting. While nobody expects a rate hike tomorrow there is a growing army of analysts that expect one in June. How Yellen phrases her guidance will be critical.


The disaster of the day was Valeant Pharmaceutical (VRX). The company reported adjusted earnings of $2.50 that missed estimates for $2.61. Revenue of $2.79 billion beat estimates for $2.75 billion. However, the company guided lower for the full year. They cut prior revenue guidance from $12.5-$12.7 billion to $11.0-$11.2 billion. They now expect to earn $9.50 to $10.50 a share. While that was troubling, there were other problems. In the actual earnings release, they projected adjusted EBITDA of $6.2 to $6.6 billion. On the conference call, they said it would be $6.0 billion. When questioned about the difference between the press release and the numbers on the call the company said, "It must have been a typo." They immediately put out a corrected press release.

The problem here is that the right hand does not know what the left hand is doing. Their constant restatement of numbers and downplaying the future has created a severe lack of confidence by investors. Also, they warned that "accounting problems" could force them to miss the deadline on their SEC filings and put them into technical default. A failure to file by the Tuesday deadline means that holders of at least 25% of any series of debt instruments could deliver a notice of default. That could cause lenders to accelerate the debt and place restrictions on future borrowing ability.

This is material because Valeant has more than $30 billion in net debt after allowing for cash on hand. Valeant said it was planning to pay down $1.7 billion in 2016, but that was also lower than the $2.25 billion they had previously guided. Valeant's market cap has fallen to $11 billion and now has a 3:1 debt to equity ratio. Valeant is also under investigation by the SEC for accounting irregularities and by several state agencies over high drug prices.

Shares declined another 51% on the news. This stock is down from $263 to $33 in only 7 months. Bill Ackman increased his stake in Valeant two weeks ago with a 14 million-share purchase. He now holds 30.7 million shares at an average price of $142.99 or $4.389 billion, which is now worth only $1.028 billion. He sent out a letter to shareholders this afternoon saying he was going to take a much more active role on the board and he still believes the company is worth several times its current valuation. That may be but it could take years to recover given the extreme blow to investor confidence.


The drop in Valeant caused biotech investors everywhere to run for the exits in nearly every biotech stock. The Biotech Index ($BTK) dropped -4% and succeeded in dragging the Nasdaq and the Russell 2000 down with it. The BTK has strong resistance at 3,000 and the support at 2,800 is likely to be broken with a retest of 2,600. This could continue to weigh on the major indexes and the market in general.


The one pharma stock that did not react to the news was Celator Pharmaceuticals (CPXX). After the close on Monday, Steve Cohen of Point72 Asset Management disclosed an 8.3% ownership position of 2.8 million shares. Shares rocketed +432% higher to $8.94 in trading on Tuesday. That increased the value of Cohen's stake by $20.7 million. With the stock trading at an average of about $1.75 over the last month, that stake was probably worth about $5 million before the spike. Bill Ackman, read it and weep.


Mead Johnson (NYSE:MJN) shares rose 11% on reports Danone and Nestle were interested in acquiring the nutrition specialist. Among other products, Mead makes Enfamil infant formula. Reports claim Mead is working with Lazard on a possible buyout. Danone and Nestle are locked in a price war and both lowered prices over the last year. That makes it tougher for companies like Mead to compete. Mead was spun off from Bristol Meyers in 2009. The good news is a bidding war between those two giants could push Mead's price higher.


Children's Place (PLCE) reported earnings of $1.19 that beat estimates for $1.11. Revenue of $498.5 million beat estimates for $497.2 million. They guided for the current quarter to earnings of $1.00-$1.06 and analysts were expecting 93 cents. The company also raised its quarterly dividend from 15 cents to 20 cents. Shares rallied +8.2% on four times average volume.


Redbox DVD kiosk owner Outerwall (OUTR) said it was exploring strategic alternatives and other financial options. A month ago a major shareholder, Engaged Capital LLC, urged the company to explore options including going private. The company also increased its quarterly dividend by 100% to 60 cents to give an implied yield of 7% in hopes of lifting its stock price. With streaming video replacing DVD rentals and phone companies giving tradeins on cell phones working or not, the company's DVD rental business is fading and the cell phone kiosks are losing money. Redbox is just one generation behind Blockbuster in obsolescence.


Terex Corp (TEX) rallied +7.4% after China's Zoomlion Heavy Industry Science & Technology Co Ltd raised its bid to $3.4 billion and added a special dividend of $1 to its prior $30 per share cash offer. Terex responded by asking for $32.75 in cash to terminate an existing merger agreement with Finland's Konecranes. It is unclear what Terex will do because some major shareholders have asked that it continue negotiations with Zoomlion in hopes of getting a higher price.


After the bell, Oracle (ORCL) reported earnings of 64 cents that beat estimates for 62 cents. Revenue of $9.012 billion missed estimates for $9.125 billion. Those numbers were down from $9.33 billion in the same period last year.

Oracle blamed the dollar for a significant impact on its results saying revenue would have been 1% higher on a constant currency basis. Revenues from cloud computing rose +40% to $735 million but software revenue declined -4% to $6.3 billion. Gross margins for the high growth cloud business are nearing 80% and that will help Oracle in the years to come. The company guided for earnings in the current quarter of 84-87 cents and analysts were expecting 82 cents.

With quarterly revenue falling for the fourth consecutive quarter the company is resorting to buybacks to lift the stock price. They authorized an additional $10 billion in their buyback program. Oracle is struggling to grow with old enemies Microsoft and IBM still around and Google, Salesforce and Amazon becoming an even greater threat. Shares rose $2 in afterhours trading.


Morgan Stanley (MS) strategists are becoming increasingly worried about a global recession and slashed their targets for the S&P from 2,175 to 2,050. They also said there was no reason to believe the current rally would continue. "Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities," the analysts said in the note. "The probability of a global recession has risen." They are putting the risk today at 30%.

Morgan Stanley sees the U.S. economy growing by 1.7% with the Eurozone growing 1.5%. Those estimates are down from 1.9% and 1.8% respectively. Emerging market growth expectations were cut from 4.4% to 4.0%. They believe the U.S. market is the safest port in the potential storm but a full-blown recession will cause all assets to be sold equally. They recommend consumer discretionary, utilities and financials as the best places to hide. To turn this into a positive comment there is a 70% chance there will be no recession.

Markets

What we have here is a failure to communicate. The Fed has failed to communicate in the many appearances by Fed speakers, a coherent strategy for future rate policy. One speaker says the Fed should exercise patience and the next one on the schedule says the Fed should accelerate its rate hike process. Several times a week we get these conflicting views and now nobody knows what to expect from the Fed this week.

The market is confused and traders have no conviction. While nobody expects a hike this week there is always the potential for a surprise. Instead of producing the normal pre Fed rally on Tuesday, investors moved to the sidelines. Decliners were 3:1 over advancers but conviction was sorely lacking. Volume on Monday of 6.3 billion shares was the second lowest of the year and today at 6.5 billion was only marginally better. Nobody was trading and it appeared even the high frequency traders were going dormant.

The S&P continues to hold just under the confluence of resistance at 2,020 with a 2,015 close. While there is no conviction to push it higher the opening dips on both days were bought. The Dow declined -108 at the open and ended with a gain of +22. The S&P and Nasdaq were negative because of the -4% crash in the biotech sector.

If Yellen puts on her dove costume and placates the market on Wednesday afternoon, we could move higher. However, there is significant risk in the guidance. If she pulls a Mario Draghi and develops foot in mouth disease, we could easily retest 1,990 or even 1,950. With Q1 earnings still four weeks away there is room to move to the upside if traders could develop some confidence in the future. A break through 2,020 could test 2,075 but that would likely be the spring high ahead of the sell in May season.


The Dow managed a gain thanks to Apple's $2 boost. Morgan Stanley upgraded the tech giant saying iPhone sales were being underestimated and they reiterated their $135 price target. The Dow is holding the recent gains thanks to stocks like Home Depot, Johnson & Johnson, Procter & Gamble and Microsoft. They are seen to be somewhat recession proof and are considered safe havens.

Financials are up one day and down the next so support from that sector has been unreliable. The Dow is holding over 17,135 and approaching resistance at 17,300. A breakout on some positive Fedspeak could take it to 17,775.



The Nasdaq is suffering under the burden of the biotech crash. In the losers list below the vast majority of the big losers are biotech and pharma stocks. Until the biotechs find a bottom the Nasdaq will be weak.

The Nasdaq Composite is wandering around at the 50% retracement level of 4,691 and cannot seem to move too far away in either direction. There is major resistance at 4,806 and the 61% retracement level, which is also the 100-day average. Any breakout from the current congestion is going to find a ceiling there. Support is the 4,600 level and just over the 38% retracement level.



The Russell is building quite a solid top at the 1,078 level. The Russell is being pressured by the decline in energy stocks and biotechs. We have seen several spikes above 1,078 but each is immediately sold. The 1,064 level has emerged as initial support but that may only be temporary. Note that the RSI is weakening and the MACD is rolling over.


Our fate rests in the words from Janet Yellen at 2:30. She can make or break the market for the rest of the week. Just remember that the initial move after the 2:PM announcement is typically a head fake. The real direction will come after she speaks at 2:30.

There may also be a market reaction to the results of the Tuesday primaries. As I write this Trump appears to be ahead everywhere but Ohio and Rubio has suspended his campaign.

I would recommend holding off on adding new positions until Thursday. There is no reason to jump into traffic when the direction can change every 5 minutes. There is always another day to trade if you have money in your account.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Pin the Tail on the Donkey

by Jim Brown

Click here to email Jim Brown
Editor's Note

Have you ever played that children's game where they blindfold you and spin you around? Our chances of launching as successful new play on Wednesday are about as good as your chance of pinning the tail on the donkey.

Market direction will be a coin toss with a new coin toss every 5 minutes after the announcement. The Fed decision at 2:PM and Yellen press conference at 2:30 will be the highlight of the day. Typically there are strong moves in both directions after those Fed events.

We already have a full portfolio and I do not want to add new plays only to see them stopped out before the day is over. We need to be wise stewards of our trading accounts and only launch new plays when there is at least a chance of knowing market direction.


NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

Down on Zero News

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes recovered from the initial drop but individual stocks were mostly down on no news. Decliners were 3:1 over advancers and it appeared investors were moving to the sidelines ahead of the Fed decision after the Bank of Japan failed to add any further stimulus. Investors were probably hoping for more stimulus to put pressure on the Fed not to hike rates any time soon.

Most of our positions declined in the weak market with the exception of HPE and CDW. We need a couple days of gains to remove the cloud of depression settling in on the market.




Current Portfolio





Current Position Changes


CMRX - Chimerix

The long position remains unopened until CMRX trades at $5.75.


BBOX - Black Box

The long position remains unopened until BBOX trades at $14.25.


HPE - Hewlett Packard Enterprise

The long position was entered at the open at $16.36.


Profit Targets

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


Stop Loss Updates

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



BULLISH Play Updates


AMLP - Alerian MLP ETF - ETF Profile

Comments:

Down slightly thanks to the continued drop in oil prices.

Tuesday 3/8 comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.

Optional

Long July $12 call, entry 55 cents. No stop loss.



BBOX - Black Box Corp - Company Profile

Comments:

BBOX still holding over support at $13 in a weak market. No news.

The position remains unopened until BBOX trades at $14.25

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.



CDW - CDW Corp - Company Profile

Comments:

Still fighting the moving averages but the short-term trend is still intact. The down trending 100-day is about to join the 150-day with resistance at $41. That hurdle showed signs of cracking today with a close at $41.22. Any further gains would be a breakout.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.

Optional

Long Apr $40 call @ $1.50, no initial stop loss.



CMRX - Chimerix - Company Profile

Comments:

Down with the biotech sector today. If support at $5 breaks I am going to cancel the recommendation.

This position remains unopened until CMRX trades at $5.75.

Original Trade Description: March 7th

Chimerix is a pharmaceutical company that discovers, develops and commercializes oral antivirals to address unmet needs in the USA. Their drug farthest along in testing was brincidofovir otherwise known as CMX001, which was planned for adult transplant patients to treat adenovirus infection. The drug did no better than a placebo in state 3 trials and they were cancelled.

However, there are other uses for that drug and they have multiple other drugs under development. This recommendation is not based on some super drug in their pipeline.

This is a technical trade based on the probability of either a sharp rebound or an acquisition.

As of today's close CMRX has a market value of about $250 million. At the end of Q4 they had $221 million in cash and $159 million in investments. The company has an estimated shareholder equity of $8.50 per share with no active drugs. With multiple drugs in the pipeline and continued research underway they represent a cheap acquisition for anyone who believes their drugs have promise. Because of their cash and investments that means any active acquisition would have to command a premium over that intrinsic $8.50 value. They do have a poison pill in place to prevent a hostile takeover but they would be open to a friendly acquisition.

They reported earnings on Feb 29th that were a loss of 82 cents compared to estimates for 68 cents. The company also said they were cutting 20% of the workforce (25 workers) in order to be "prudent with their capital."

Earnings are May 9th.

Shares traded to a low of $4.41 post earnings on the 29th and have risen steadily over the last five days with a 5% gain on Monday alone. I am recommending we buy the shares with a trade at $5.75 with our first exit target around $7.60 if no news appears. That would be a 32% gain if we exited there.

I am not recommending any options but the May $7.50 call is 65 cents.

With a CMRX trade at $5.75

Buy CMRX shares, initial stop loss $4.75.



DRII - Diamond Resorts Intl - Company Profile

Comments:

Minor decline in a weak market.

Original Trade Description: March 10th.

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

With a DRII trade at $24.25

BUY DRII shares, initial stop loss $20.50.

No option recommended because of wide spreads and high prices. However, you could buy the shares and sell a covered call with the May $25 call @ $2.90.



DWRE - Demandware - Company Profile

Comments:

Today's drop was painful after the nice gain on Monday. This is Nasdaq weakness not stock specific. Support at $36 was not even touched.

Target $43.25 for an exit.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.

Optional

Long April $35 call @ $2.70, see portfolio graphic for stop loss.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Nice gain in a weak market to start the position off right. Initial resistance is $17.25.

Original Trade Description: March 14th.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "We saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

Position 3/15/16:

Long HPE shares @ $16.36, initial stop loss $14.50.



SGI - Silicon Graphics Intl - Company Profile

Comments:

Minor decline in a weak market. No news.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.



WIN - Windstream Holdings - Company Profile

Comments:

WIN fell -8% on no news. I could not find any reason for the decline. Volume was normal. Long term position, no rush.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Buy WIN shares, currently $8.22, initial stop loss $7.10

Optional

Buy August $9.00 call, currently .40 cents. NO STOP LOSS




BEARISH Play Updates


VXX - VIX Futures ETF ETF - ETF Description

Comments:

Weak market but volatility rose only 29 cents. We have plenty of time to reach our target.

The exit target is 19.50 to close the position.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
02/27/16 adjust exit target to $19.50
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82





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