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Newsletter

Daily Newsletter, Tuesday, 3/22/2016

Table of Contents

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

Market Wrap

Market Not a Focus Today

by Jim Brown

Click here to email Jim Brown

The equity market barely reacted to the Brussels news and volume was very light. There was an almost total absence of stock news in the headlines.

Market Statistics

The morning terrorist attack monopolized the headlines all day and even earnings from Dow component Nike after the close was hardly a blip in the news stream. Given the five weeks of market gains, a lack of a negative reaction to the attacks was positive. For three days now, the market has consolidated without a major move. Monday's intraday range was the narrowest for 2016. Monday's volume was the lowest of the year at 6.16 billion shares and today was even lower at 6.12 billion. The Dow has paused right at downtrend resistance so a lack of a decline is bullish.


In the economic news, the Richmond Fed Manufacturing Survey exploded out of a prolonged slump with a reading of 22 for March. This was the highest reading since December 2010. That compares to -4 in February. New orders surged from -6 to +24. Analysts cautioned that such a big rebound after five years of mostly lackluster readings could be an error in the survey. However, other regional surveys have also been improving.

The separate Richmond Services Survey rose from -2 to +9 to erase most of the -12 decline from January to February.



The calendar for the rest of the week is highlighted by the GDP on Friday, New Home Sales on Wednesday and the Kansas Fed survey on Thursday. The market is closed on Friday for Good Friday.


The Dow Transports were down slightly on the terrorist attack because of the drop in the airline sector. The Transports were only down about 0.8% and that is very minimal after a +1,500 point rally since the January lows.


Negative reactions to Monday's earnings included G-III Apparel (GIII). Shares fell -19% after the company posted a 17-cent profit and analysts were expecting 42 cents. Revenues rose +2.5% to $527.4 million that also missed estimates for $566.4 million. The company blamed weak performance on warm weather but that excuse has been used up. The CEO said the outerwear business was "heavily affected by the warmest winter on record" and that weakness was fully responsible for the poor results.

The company guided for the full year to earnings of $2.55-$2.65 and well below analyst estimates for $3.14. I like G-III for the future. They just signed some new marketing deals that will give them a big upside but it will be next year before those brands are fully implemented. I would look for a dip to $40 for a long-term buy. Some of their dozens of brands include Calvin Klein, Kenneth Cole, Tommy Hilfiger, Guess, Jessica Simpson, Ivanka Trump, Alyssa Milano, etc.


The ExOne Company (XONE) reported a loss of 8 cents after the bell but that beat estimates for a loss of 16 cents. Revenue rose +2.7% to $16.2 million and beat estimates for $14.89 million. Backlog at the end of the period was $16.5 million. XONE develops and markets 3D printing machines. Shares rallied 7% in the regular session to a nine-month high at $12.96 then added another 60 cents after the report.


Five Below (FIVE) reported earnings that beat the street by a penny at 77 cents. Revenue of $326 million also beat estimates for $323 million. The guided to current quarter revenue of $186-$188 million and analysts were expecting $187.8 million. They forecasted earnings of 9-10 cents and analysts were expecting 10 cents. Shares declined -5% in afterhours after a -1.6% decline in the regular session.


Krispy Kreme Doughnuts (KKD) reported earnings of 22 cents that beat estimates for 20 cents. Revenue rose 4% to $130.4 million but missed estimates for $131.4 million. Same store sales rose +1.6% but fell short of estimates for 2.9% growth. For the current year they expect to earn 87-91 cents and below consensus of 92 cents. They increased their stock buyback program by $100 million. Because of the low guidance shares declined from the $15.38 close to $14.17.


Red Hat (RHT) reported earnings of 52 cents that beat estimates for 47 cents. Revenue of $544 million beat estimates for $537 million. This was the 56th consecutive quarter of revenue growth. However, Red Hat guided for the current quarter to earnings of 50 cents and revenue of $558-$566 million compared to 44 cents and $481 million in the comparison quarter. That looked good on the surface but analysts were expecting 50 cents and $554.6 million. They met the estimates but shares fell -$2.50 to $73.10 in afterhours. On the positive side, the company said order backlogs were $2.13 billion a 15% increase year over year.


The big dog after the close was Dow component Nike (NKE). The company reported +22% earnings growth of 55 cents compared to estimates for 48 cents. Revenue rose 8% to $8.0 billion but missed estimates for $8.2 billion. Nike said revenue would have been up +14% on a constant currency basis. That would have been $8.65 billion. Margins rose from 45.5% to 45.9%. Future orders rose +17% on a constant currency basis. That beat estimates for 13.4% growth. Future orders from China rose +36%.

Nike guided for full year revenue growth of high-single to low-double digit percentages and low-teens earnings growth. Analysts were looking for 15% earnings growth and 10% revenue growth. Shares dropped from $65 at the close to $61 in afterhours. I am a Nike believer. I would be looking for a buying opportunity in the $58-$60 range. They are doing over $8 billion a quarter in sales, just introduced several new models, are riding the March Madness wave and have strong momentum headed into the summer Olympics. I believe they lowered their estimates because of the currency issues. How many other companies are reporting growth like this?


A federal jury in California has ruled in favor of Merck (MRK) and against Gilead Sciences (GILD) over a patent for a Hepatitis C drug. Merck accused Gilead of infringing on Merck's patents it had filed over a decade ago and claimed Gilead's Sofosbuvir infringed on those patents. Merck is seeking billions in damages and royalties on sales of both of Gilead's Hep-C drugs. Sofosbuvir is the active ingredient in Gilead's Sovaldi and also a component in Harvoni. Those two drugs produced revenue of $19.1 billion for Gilead last year. A month ago, a judge made the same ruling and the jury verdict today means the trial will move into the damage phase to determine how much Gilead owes Merck.

There is another battle under way to determine if Pharmasset, a company Gilead bought for $11 billion in 2011 to get the rights to Sovaldi, used Merck's patents to develop that drug. Gilead claims Pharmasset was working on Sofosbuvir a year before Merck filed the patents. Gilead had originally filed suit seeking to declare the Merck patents invalid. Gilead shares declined -$4 in afterhours. I would expect them to decline further.


Crude oil defied gravity once again. The April futures contract expired at the close on Monday. The May contract became the front month at $41.50 and in theory that contract should have seen selling at the open this morning to bring it in line with the expired price. Obviously, that did not happen and crude traded up to $41.90 before fading at the close.

The headline that lifted prices was a comment from Saudi Arabia saying they would take part in a production freeze even if Iran were not part of the agreement. Previously several OPEC nations had said they would not participate unless Iran was forced to participate.

In reality, this changes nothing. Iran wanted a 4.0 mbpd production cap when they are only producing 2.6 mbpd today. That would allow them to hike production 1.4 mbpd under the "freeze" agreement. Obviously, that was not a freeze. If Iran does not sign the agreement, they will still boost production so nothing has changed. There is no fundamental reason for oil prices to be this high. It is strictly headline spam. The OPEC nations have figured out they can raise the price of oil simply by creating meaningless headlines.

After the close today, the API reported an inventory build for the week ended on Friday of 8.796 million barrels. If the EIA report on Wednesday confirms this number it is simply more proof that a fake freeze agreement will be worthless.


Markets

The markets are holding up well given the five weeks of gains. The very low volume is somewhat bullish because it suggests there is no distribution in progress. Distribution is what happens at market tops when holders of large positions begin to sell off those positions in a calm and orderly manner to the investors that believe the market is still going higher. During a distribution phase, the volume rises but the markets do not. New investors are fighting an abundance of supply.

For instance, McDonalds (MCD) has rallied to its prior high of $124. If a fund owned 20 million shares they would tank the stock if they put in a sell order that large. Instead they put in a slow succession of smaller sell orders of 10-20,000 shares, sometimes with a limit price of say $123.75 and just under the high. As shares are sold, they are replaced with new sell orders. The market absorbs the volume because a lot of investors are expecting higher highs. The selling fund is "distributing" their shares to thousands of willing buyers. In the case of McDonalds there have been a couple days of higher volume so there may be some distribution occurring there.


We are not seeing that increase in market volume that would suggest there is any distribution in progress. In fact, the lack of volume suggests the current holders of equities are not willing to sell. Market sentiment is bullish because the major indexes have not yet reached those major resistance levels I have laid out in recent weeks.

The S&P appears to be stuck at 2,050 and downtrend resistance. Since the much stronger resistance levels begin around 2,075 this pause for consolidation may actually give the index the power to reach that higher resistance band. I am not convinced since the S&P has stalled here for the last four days but the lack of any material profit taking is definitely bullish.


The rebound in the biotech sector has been a major factor in support of the S&P and the gains in the Nasdaq. The Biotech Index ($BTK) has rallied +9.4% in the last four days after dipping to 2,705 on Thursday. This is a major rebound BUT there is also major resistance at 3,000. A break over 3,000 would be very bullish and could spark a significant rally in the S&P, Nasdaq and Russell 2000.


The Dow has also rebounded to just below downtrend resistance and appears to be consolidating for a move higher. The lack of any material selling, even with the terrorist attacks, suggests the next move could be higher. Nike will be a drag on the index at Wednesday's open with about a -25 Dow point impact. Falling oil prices could be another negative if the EIA inventories are very high and traders decide they care.



The Nasdaq continues to fight resistance at 4,806 but closed well over that level at 4,831 today thanks to the biotech rebound. The Nasdaq has succeeded in defeating the 100 and 150-day averages with the 200-day at 4,860. The Nasdaq has not been reactive to the moving averages so that is really just smoke we have to ignore. The key level ahead is 4,926 and then 5,100. Support is well back at 4,715.



The Russell 2000 is currently fighting psychological resistance at 1,100. There is no recent resistance in that level but it has definitely been a factor. The index has stalled there for three consecutive days. There is clear support at 1,078 and 1,064 and resistance at 1,108 and 1,120.

If the biotech rebound continues and oil does not decline, a couple big "IFs" the Russell could break out of that 1,100 level and try to move higher but like the other indexes the resistance only gets stronger the higher it goes.


While I do not see indications of a big sell off in the immediate future, I am still concerned that the path to higher levels is paved with some significant resistance. The S&P has not moved more than 1% in a single day in the last seven days. That is actually a positive because it means the market forces are evenly balanced. If we can continue moving higher at this snail's pace the rally has a much better chance of continuing. Sudden large moves tend to trigger profit-taking events.

Typically, the market is higher heading into the Easter weekend. We have not had a lot of success with historical trends in recent months but hopefully this one will return.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Firewall

by Jim Brown

Click here to email Jim Brown
Editor's Note

The best place to stop cyber attacks is before they gain access to your network. Fortinet is a leading provider of firewall services worldwide to prevent access to internal network by malicious hackers.


NEW BULLISH Plays


FTNT - Fortinet Inc - Company Profile

Fortinet provides cyber security solutions for enterprises, service providers and government organizations worldwide. They offer FortiGate physical and virtual appliance products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network accelerations.

Essentially they provide an enterprise level roadblock or firewall between the Internet and the organizations internal network and servers. If you can block the attacks at the primary entry into the network then the attackers cannot run rampant inside the network.

A couple weeks ago Fortinet signed a cyber security partnership agreement with NATO. We all realize NATO is facing cyber attacks all across Europe and the organization is a major target. Fortinet will help improve the cyber defense for the entire network. Implementing the Fortinet devices will raise awareness of the cyber threats to the network and allow early detection and elimination.

Fortinet has more than 210,000 enterprise customers worldwide including some of the largest and most complex organizations, corporations and governmental agencies.

This will be a short-term play because earnings are April 18th.

Shares are trying to break over resistance at $30 with the high at $30.36 today before the market rolled over.

With a FTNT trade at $30.50

Buy FTNT shares, currently $29.60, initial stop loss $28.50.

Optional:

Buy May $31 call, currently $1.70. Initial stop loss $28.50.




NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

No Material Impact

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets did not show any direct impact from the Brussels attack but the week is not over. There could be a lot of follow on headlines as police search for the escaped attacker and any accomplices. This could weigh on the market as those headlines hit the wires.

Not declining materially for the last two days is actually bullish for the market. If those depressing headlines do not appear we could see an uptick in the indexes. Remember, they are working off five weeks of gains. Volume has been very low with Monday the lowest day of the year so far.

However, the Dow and S&P are showing signs of exhaustion with both of them failing to continue their prior gains. The Dow stopped right at downtrend resistance.




Current Portfolio





Current Position Changes


DEPO - Depomed

The short position was opened this morning at $13.11.


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:

Minor gain to a four month high but still a gain. No news.

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:

There was a bad tick at the open this morning. One share traded at $39.88 on the Direct Edge EDGA exchange at the same time 6,170 shares traded at $41.08 on the NMS. The bad tick would not have triggered our stop loss so the play continues. The close was another two-month high.

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:

Minor rebound after the marketing investigation was announced at a competitor on Monday and caused a 15% decline.

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:

This is becoming frustrating with DWRE moving between support and resistance every couple days. If we move back to resistance, I will tighten the stop loss to take us out on the next cycle.

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



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

I am not surprised to see some resistance form at the spinoff high at $18. We need to be patient and let this pass.

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:

Another rebound back to resistance. Eventually it should break out. Nice pattern of higher lows. 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:

Minor gain when transports were weak and shares posted 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:

One step forward and two steps back. 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


DEPO - Depomed - Company Profile

Comments:

DEPO spiked at the open to give us a better entry point. The 64-cent gain for the day came on a rebound in the biotech sector of +2.7%. This caused short covering in all the medical stocks. Maintain the stop loss at $14.25 and we will exit quickly if the biotech trend has changed.

Original Trade Description: March 21st

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.

Position 3/22/16 with DEPO opening trade at $13.11

Short DEPO shares @ $13.11, initial stop loss $14.25

No option recommendation because of wide spreads.



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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