Option Investor
Newsletter

Daily Newsletter, Monday, 3/21/2016

Table of Contents

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

Market Wrap

Market Struggles For Gains

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market struggled for gains this Monday as we wait on the next earnings cycle, and to see which way oil prices are heading. Not much was happening in terms of market moving news today, except a little volatility in the oil patch and a statement from the Fed's Dennis Lockhart. He says the next interest rate hike could come as soon as April; we're closer and closer to full employment with a mid term expectation to hit inflation targets.

While our markets were mostly mixed in today's session, international markets were not. Chinese markets saw big gains driven by newly relaxed margin lending requirements. Margin lending curbs, one of the reasons for China's market melt down last year, have been relaxed by the state run China Securities Finance Corporation which will start offering short term loans to Chinese securities companies. Japan was closed for a holiday. European markets had a seesaw day, first down then up and then down again as oil prices and the news from China wrestled for dominance.

Market Statistics

Futures trading was light in the early morning session. The US indices were indicated to open flat to slightly negative and held steady up to and until the opening bell. There were no economic or market moving earnings releases in the pre-market session to affect trading and even a decline in oil prices had little impact. The open was as expected, flat to mildly negative with a brief test of Friday's closing levels which led to a small pull back during the first few hours of trading.

By noon the early losses were reversed, the indices were back to break even levels and struggling with resistance. The market wrestled with this level for the next hour and by 1PM was breaking out to new highs. Afternoon trading was much the same as the morning, sideways drift, except above break even levels instead of below. No indices made significant gains but gains were made across the board and were held into the close of the day.

Economic Calendar

The Economy

Only one piece of official economic data today, Existing Home Sales, and it was not positive. Existing sales fell -7.1% versus an expected fall of only -2%. The annualized rate is now 5.08 million, down from 5.48 million last month and an expectation for that level to hold fairly steady into this month. Two reasons for the decline are low inventory and rising prices, the median price rose to reach the 2007 high and the highest level since before the housing crunch.

Moody's Survey of Business Confidence declined this week by -0.5%. This is the first decline in 5 weeks but the diffusion index remains near recent lows. According to Mr. Zandi's commentary business sentiment has stabilized since falling off over the winter, expectations for current conditions are the weakest with those for the summer beyond more positive. The US and EU show the brightest expectations while Asia and South American businesses are more negative.


According to FactSet expectations for first quarter 2016 continue to decline. In their statement they say expectations are flat from last week but that means they fell only -0.1% to -8.4%. This is the lowest level of expectations for the first quarter, down from +15% in the middle of last year. Full year 2016 projections also fell, by -0.2%, to -2.5% and the lowest levels we've seen for this figure as well.


Looking further out, to next quarter the 3rd quarter, the 4th quarter and next year changes to expectations are mixed. 2nd quarter projections held steady at -2.2% for the 2nd week running but are at the low of the series. 3rd quarter projections fell -0.2% to 4% and are the low of their series. 4th quarter projections held steady at 9% for the 2nd week, the low of that series. Full year 2017 projections have ticked higher, by 0.1%, and are at the highest level of that series. Looking at them all together it appears as if near term expectations are still weakening, mid term expectations are holding flat and long term expectations are rising.


There is not much on the economic calendar this week. The next major report is the New Homes Sales data on Wednesday, followed by durable good orders and weekly jobless claims on Thursday and then the 3rd estimate for 4th quarter GDP on Friday. Next week however things pick up again, it will be the turn of another month which means monthly job data and a host of other macro economic events.

The Oil Index

Oil prices were a bit volatile today but in the end were mostly steady around $40. Early in the morning saw prices decline bu about 2% on last week's rise in rig counts. The rise breaks nearly 3 months of continuous rig declines but only adds one to the total. Later in the day prices rose by about 2% on a reported draw down at the Cushing storage facility. The draw down, about 560,000 barrels, brings the Cushing supply to about 69.5 million barrles, just shy of 70 million and full capacity at the facility. Neither bit of news is definitive in terms of oil prices or supply/demand outlook which remains biased toward the supply side. Prices may rise further in the near term but the fundamentals remain supportive of lower oil prices so caution is due.

The Oil Index fell about -0.5% in today's session even after oil prices regained their footing. The index created the third of three spinning top candles, at resistance and a two month high. Resistance is near 1115 and if broken would make a 3 month high. The indicators persist in bullishness; momentum continues to rise although the rate of change has fallen off and stochastic is trending in the upper signals zone. Based on these I would expect to see the Oil Index at least test resistance further, a break out may however be dependent on oil prices and/or earnings results for the 1st quarter. The energy sector is expected to post a greater than -90% decline in year over year earnings growth, reason enough to be cautious in this sector over the next month or two.


The Gold Index

Gold prices fell a bit today as the dollar regained some of the ground it lost last week. Aiding this was comments from Lockhart to the effect that an April rate hike was on the table. Lockharts statements are more of the same kind of rhetoric we've been getting all along, neither indicating an official stance nor helping to clarify the situation and only serving to add volatility to an already skittish market. Based on today's home sales data it doesn't look to me like a rate hike is coming next month but we'll have to wait until then to know for sure. In the meantime we have what the FOMC actually did last week, weaken the dollar, and what the ECB did the week before, strengthen to euro, to guide us. In that light it looks like the dollar will remain low or move lower until inflation data is more firmly pointing to FOMC rate hikes which should at least support gold prices near their current levels if not move it higher. Today spot gold fell about -0.75% to trade near $1243.

The gold miners fell in tandem with gold but are also holding near the recent highs. The Gold Miners ETF GDX lost about -1% but remain above the $20 level. The high was driven on a strong wave of momentum but that movement may be coming to an end. Both MACD and stochastic have fallen off since reaching the high, diverging from it, and are now pointing lower. This may not result in a pull back, or a very deep one, but do not support additional upside at this time. If gold prices are able to stage a comeback, move back to their highs or higher, the index will likely follow. If not a correction/profit taking should be expected. Resistance is between $21.00 and $21.50, first target for support is near $19 and the short term moving average.


In The News, Story Stocks and Earnings

The Dollar Index made some small gains from last week's low. The low, driven by dovish fed outlook on inflation targets and the rate hike time line, may hold although I doubt it will not be retested. There is little in the way of economic data this week to provide support or resistance but the outlook, at least for now, is bearish. The indicators are mixed, stochastic is rolling over within the lower signal zone while MACD remains bearish, but are more consistent with a bear market relief rally than not.


Apple was big in the headlines today due to a product release event. The event was rather lack luster in that nothing really new was revealed. They released a smaller version of the iPhone, a cheaper price for the watch, a smaller iPad and a few other non-needle moving items. The news helped to send shares of Apple up to a new 2.5 month high but the lack of a really new and innovative product helped to reverse that gain. By end of day shares of Apple were showing a loss and closed down by about -0.25%.


Starwood Hotels is still in the news as the bidding war to buy the company heats up. The latest development is that Marriot has upped their bid, outbidding Anbang, and is now the superior offer. The newly amended offer values Starwood at $79.53 a share and would deliver $21 and 0.80 shares of Marriot for each share of Starwood. The news sent shares of Starwood up by another 4.25% to trade above $84.


The Indices

Today's action was very lack luster. Action was sideways at best, a little bias to the upside, although gains were made across the board. The biggest gainer was the NASDAQ Composite which posted an increase of only 0.27%. Today's candle is another small white bodied candle, little more than a spinning top, but it did set a new high. The indicators are pointing higher in the near term, momentum is positive and stochastic %K is moving up, although there is growing sign of weakness in the rally. Momentum is fading and stochastic %D is moving lower, both divergent from the new high. The market could continue to move higher on momentum alone, but I think that if a correction begins it could be sharp and fast. Upside target is near 4880 with first target for support near 4750.


The Dow Jones Industrial Average made the 2nd largest gain in today's session, about 0.12%. The blue chips also made a small spinning top type candle and also set a new a new high. The move is driven on a wave of strong momentum that could carry it up to the 18,000 level but like with the techs the move is showing some weakness. MACD momentum, while positive, is slowing and stochastic is showing signs of rolling over, both indicative of potential weakness. If this index should pull back first target for support is near 17,200 and the long term trend line.


The S&P 500 made the third biggest gain in today's session, about 0.08%, and created a small spinning top candle. This index is also riding high on a wave of strong momentum, momentum that could keep carrying it higher, but that momentum is waning with signs of weakness present in the indicators. The index could keep moving higher with targets near 2075 and 2100 but any move beyond that would require a bullish catalyst and I can not think of a possible one at this time. First target for support is near 2025 with next target near 2000 and the short term moving average.


The Dow Jones Transportation Average is today's laggard posting no gain, and no loss, 0.00%. I've been watching the market a long time and this is the only time I can remember in which there was ZERO gain or loss for the day. Today's action created a perfect doji style spinning top with mixed indicators. MACD is pointing higher and on the rise, stochastic is pointing lower and falling beneath the upper signal line; both are diverging from the current high. The index is riding a wave of momentum like the rest of the market that could carry it higher, upside target near 8,350, but this is no time for new positions. Down side target should the index pull back is near 7,700.


Today's action was light and without direction. Following last week's rally this is not to surprising, the market needs time to come to terms with where it is, what is going on and what is expected to happen. Without much in the way of data, earnings or other catalysts there is a good chance that the market could could continue to meander at or near current levels, especially considering that this is a holiday shortened week.

The risk at this time is still the upcoming earnings season. Expectations continue to fall, outlook is the worst it's been for this cycle and for any of the preceding 3 quarters of negative growth, and that could derail the rally. On top of that we have the end of a quarter to contend with. Next week will see the end of the first quarter and could also see some heavy selling as managers seek to lock in whatever gains they have managed to make this quarter and to re-position for the earnings cycle and later in the year.

I remain bullish into the end of the year, earnings are expected to improve in the second half and next year, but am very wary of the market at its current levels and expectant of a correction in the near to short term.

Until then, remember the trend!

Thomas Hughes


New Plays

Bio-wreck

by Jim Brown

Click here to email Jim Brown
Editor's Note

Stocks in the biotech sector have some ugly charts. There is a slow motion train wreck in progress. Some are declining because the sector is declining. Others are declining because their drugs are not passing the clinical trials or they may be a target of new price regulations in 2017.


NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


DEPO - Depomed - Company Profile

Depomed is a specialty pharmaceutical company engaged in the development, sale and licensing of products for pain and other central nervous system conditions in the USA.

The company reported adjusted earnings of 16 cents that missed estimates of 35 by a mile. Revenue of $111.2 million also missed estimates for $114 million. For the full year the company reported a loss of $1.26 per share or $75.7 million.

In late February the company reported the results of a 635 patient trial of pain drug GRT6005. While pain was reduced there were low levels of severe adverse events that were more frequent on higher doses of the drug. Shares declined on the news.

Shares have been trending lower since the 29th. There was a moderate short squeeze on the 11th that corresponded with a short squeeze in the entire biotech sector. Shares immediately rolled over and moved to new lows as soon as the sector index rolled over.

News flow has been very sparse on Depomed in March and shares are accelerating to the downside.

Earnings are May 10th.

Sell short DEPO shares, currently $12.99, initial stop loss $14.25

No option recommendation because of wide spreads.





In Play Updates and Reviews

Exactly as Expected

by Jim Brown

Click here to email Jim Brown

Editors Note:

Post expiration Mondays are rarely directional as traders clean up positions left over from the prior cycle. Monday's lack of market movement was a textbook example of an option expiration hangover. Tuesday will start a new option cycle for short-term traders and it is also the first day of the normally bullish week before Easter.

We do not know if the normal bullish trend will play out as expected because of the 13% rebound from the February lows. The markets are already over extended but can always become even more overbought if conditions are right.

The Dow is headed into a strong resistance zone but could run another 130 points before getting into trouble.




Current Portfolio





Current Position Changes


HIMX - Himax Technologies

The recommendation for a long position in HIMX has been cancelled.


TRN - Trinity Industries

The long position was opened this morning at $19.15.


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:

AMLP will continue to rise and fall with the price of oil. Long term the trend will be up.

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.

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.

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:

The breakout continued with a minor gain after winning a bronze award from Stevie Awards for customer service.

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.

Position 3/18/6 with a BBOX trade at $14.25

Long BBOX shares @ $14.25, see portfolio graphic for stop loss.

No options because of wide spreads.



CDW - CDW Corp - Company Profile

Comments:

CDW closed over the 100/150 averages on Friday. That was a positive event and they held over those levels again today. Any further gains could trigger a breakout. There is a nice pattern of higher lows over the last week. The size of the candles are shrinking and that suggests we are getting closer to future gains.

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, see portfolio graphic for stop loss.

Optional

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



DRII - Diamond Resorts Intl - Company Profile

Comments:

After closing at a new three-month high on Friday shares plunged -$2.95 to $22.75 after the Consumer Financial Protection Bureau (CFPB) had launched a probe into competitor Westgate Resorts investigating its sales and financing tactics.

There has absolutely nothing to do with Diamond but a sector hit that also took down Wyndham Worldwide (WYN) with a $4 loss.

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.

Position 3/10/16 with a DRII trade at $24.25

Long DRII shares @ $24.25, see portfolio graphic for stop loss.

No option recommended because of wide spreads and high prices.



DWRE - Demandware - Company Profile

Comments:

DWRE came to a dead stop at resistance at $39.15 and then gave back half its gains today to close at $37.51. We need a breakout soon!

Target $43.25 for an exit on the stock position.

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

Closed 3/17/16: Long April $35 call @ $2.70, exit $3.60, +.90 gain



HIMX - Himax Technologies - Company Profile

Comments:

Himax failed at resistance at $11 twice and then collapsed under support at $10.50. I am cancelling the long recommendation for HIMX.

CANCEL LONG RECOMMENDATION

Original Trade Description: March 17th

Himax is a fabless semiconductor company providing display and imaging technologies to consumer electronics worldwide. They operate in two segments including Driver IC (integrated circuits) and Non-Driver products. Their ICs are used in television controllers, laptops, monitors, mobile phones, tablets, digital cameras, car navigation and other consumer electronic devices.

The company reported earnings for Q4 of 3.6 cents that beat estimates on a 7.5% increase in revenue to $178 million. They raised guidance for the current quarter and the full year. They are debt free and had $148 million in cash compared to $126 million in the prior quarter.

The company said business was booming and demand from China was growing rapidly. The various new products shown by various manufacturers at CES in January were now going into production demand for the ICs was increasing. The demand for 4K TVs is increasing as the prices drop and Himax expects demand to double in Q1 over Q4 and triple over Q1 2015. Large panel ICs are expected to grow from 10% to the high teens in percentage in the current quarter.

Shares closed at a two-year high on Monday and then dipped with the market. They returned to close at that high again on Thursday just under $11. A move over $11 targets resistance at $14.50.

Cancel HIMX recommendation.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Excellent move over resistance and this could be the trigger for the gains to accelerate.

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, see portfolio graphic for stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

A minor setback after closing right on resistance on Friday. We have little risk at this point and the potential for a decent gain if the stock breaks out. 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.



TRN - Trinity Industries - Company Profile

Comments:

The position was entered at the open and shares posted a minor gain to a new four-week high.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings May 30th.

Position 3/21/16:

Long TRN shares @ $19.15, initial stop loss $17.50

Optional:

Long July $20 call @ $1.50, no stop loss. Plan to keep it until June even if we are stopped out of the TRN shares.



WIN - Windstream Holdings - Company Profile

Comments:

On Friday, WIN spiked to resistance at $8.00 again but failed to penetrate. A -32 cent decline today knocked it back down near resistance. Maintain that $7.10 stop and hopefully the decline is over.

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.

Position 3/11/16

Long WIN shares @ $8.22, initial stop loss $7.10

Optional

Long August $9.00 call @ .40 cents. NO STOP LOSS




BEARISH Play Updates


EGHT - 8X8 Inc - Company Profile

Comments:

No material decline but the rebound from Friday failed to continue higher. If we get a decline on Tuesday the trend is still intact.

Original Trade Description: March 16th

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

Position 3/17/16 with a EGHT trade at $9.80

Short EGHT shares @ $9.80, initial stop loss $10.25.





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