Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/29/2016

Table of Contents

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

Market Wrap

Yellen Says Slow

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market floundered all morning, waiting on a speech from Janet Yellen, and then shot higher on here dovish stance. Yellen was today's headliner for sure, speaking on monetary policy before the Economic Club Of New York, but she was not the only Fed member to speak today and not the only one this week.

San Francisco Fed president Williams made some comments on TV early this morning to the effect that the FOMC should stay on track (referencing a gradual pace of rate increases as has been telegraphed time and time again), that the US economy was on track and that international growth or lack of growth should not be a driver of future policy decisions. Also on tap today were not one, but two, speeches from Fed President Kaplan with additional speeches from other members scheduled for tomorrow and Thursday.

Market Statistics

International markets appear to be hanging on every word from the FOMC and its members, just like we are. Asia and European markets were all flat ahead of Yellen's speech despite another decline in oil prices.

Futures trading on the US indices was also flat and unaffected by data or earnings. When the opening bell sounded the indices made a quick dive, the SPX lost about 5 points, only to have near term support step in. Most indices held near break even up to the lunch time hour, the odd man out was the NASDAQ Composite which got a boost from Apple. Shares of Apple rose 1.5% in the wake of the DOJ dropping the case against it after the FBI was able to unlock Farook's phone on its own.

The market seemed to like what Yellen had to say, which was basically a reiteration of the FOMC policy statement of two weeks ago; as she took the podium indices began to move higher. She basically toed the line of gradual increases, citing research supporting the use of slower increases and the ability of the FOMC to increase the pace if the economy needs it. Following the speech the indices took a half hour or so to digest the statements and then began a steady march higher.

Economic Calendar

The Economy

Not much in the way of economic data today, just the Case-Shiller real estate price index and Consumer Confidence. The Case-Shiller 20 City Index shows that, on a not-adjusted basis, prices for homes in the 20 largest metropolitan areas rose 5.7% on a year over year basis. On an adjusted basis prices rose only 0.7% (not sure how seasonal adjusting affects housing prices but apparently it does). The central cause of rising home prices is a lack of inventory, according to the report there is only about 4.5 months of supply available at this time.

Consumer Confidence was released at 10AM and gained 2.2% from last month's reading. Confidence rose to 96.2% in March, reversing a similar drop last month. Confidence in present conditions fell -1.5% while expectations for the future rose 5.8%. The change in confidence is due, according to the report, to a decrease in financial market turmoil, consistent with evidence provided by the Moody's Survey Of Business Confidence.

According to the CME's Fed watch tool there is still only a 7% chance of a rate hike at the April meeting. The chances only rise to 31% in June, 46% in July and only barely move above 50% in September.

The Oil Index

Oil prices took a dive today, falling more than -3.5% at the days low. Over supply, low demand, high storage and a lack of certainty over the upcoming meeting to supposedly cap production combined to pressure prices lower. There was a slight rebound late in the day, due to a weakening dollar in response to Yellen's comments, but not enough to regain today's losses. WTI broke below $38.50 today and is now trading at the lowest level in two weeks. Oil prices may consolidate near this level into the near term unless another catalyst emerges. This could be renewed interest in production caps, Iran joining the fight to prop up prices or other; without reason to move higher supply and demand outlook may push prices back to $35 or lower.

The Oil Index fell about -1% to test support near 1,050 and the short term moving average before bouncing and moving higher on Yellen's comments. The index is still tied to oil prices but today's action was a little different as a weaker dollar helped to support the sector, if not the underlying commodity. The indicators continue to weaken and point lower, suggesting additional testing of support and/or a break below the moving average. Support is along the 1,050 level at this time, a break below here could take the index down to 1,025 or 950 depending on how far, or if, oil prices continue to fall.


The Gold Index

Gold prices got a nice little boost from Ms. Yellen. Her stance, that of the FOMC, that policy changes would be gradual at best, that growth targets were falling and that there was still "scope for accommodation" served to weaken the dollar and drive spot gold higher. Today gold prices rose by about 1.75% on her comments and appears to be heading back to the top of the recent range. First upside target is $1250 with a chance of moving up to $1280.

The Gold Miners ETF GDX also moved higher on Yellen's comments. The ETF gained nearly 5.5% in a move that confirms support along the short term moving average and appears set to retest recent highs near $21. The risk at this time is that the indicators remain weak and could lead to further correction should the data, and there is still a lot due out this week, lead the market to fear a rate hike despite what the FOMC is indicating.


In The News, Story Stocks and Earnings

The dollar continued to fall today as Yellen's speech backed up what the FOMC said two week's ago. The pace of rate hikes will be gradual, more gradual than first thought, targets for growth and inflation have fallen and there are still risks to the economy. The Dollar Index itself fell more than -0.8% in a trend following move that appears set to retest recent lows near $94.50. The indicators are rolling over into what could become a bearish trend following signal but have not yet completed the move. Regardless, the dollar is likely to remain weak relative to the December high up to and until a shift in fundamentals occurs.


Homebuilder Lennar reported before the bell and delivered better than expected results. EPS was $0.63, $0.11 better than expected and up 26% from last year. Deliveries of homes rose 12%, new orders are up 10%, back log orders are up 13% and revenue is up 21%. The market like the news and sent the stock up by more than 2% to trade at a near 3 month high. Based on today's Case-Shiller report, yesterday's Pending Sales and other housing data that blames low inventory on weak sales and high prices it looks like strong performance can be expected from this and other home builders into the next few quarters at least.


Specialty food maker McCormick reported earnings this morning as well. The company reported earnings better than expected and guided full-year 2016 results in-line with estimates. Sales in the first quarter were reported up 2%, 7% discounting the impact of currency conversion, resulting in EPS of $0.74. This is up $0.04 from this same time last year and a nickel ahead of analyst estimates. The stock responded favorably to the news, and comments to the effect that currency conversion would have less impact this year, and climbed to a new all-time high. The indicators are rolling into a bullish trend following signal, the stock looks set to continue its move higher.


The VIX made a nice move lower today, shedding close to -9% in today's session. The volatility index is now trading near its recent low and below the $14 level and heading for a 5 month low. Today's statements from Janet Yellen have gone a long way toward relieving fear in the market, fear of rate hikes anyway, but leave the door open for other fears... namely reduced growth expectations and inflation targets which are the cause for FOMC dovishness.


The Indices

Today was a tale of two markets. Early trading, pre-Yellen speech, was a wash. Trading was flat, lack luster and without much volume. Trading post-speech was much different. The indices moved higher, consolidated and moved higher still, all on increased volume. The day's leader was the NASDAQ Composite which got a boost from Apple as well as from Yellen's speech. The tech heavy index gained more than 1.65% in a move up from near term support. Today's candle is long and white, an indication of some strength, although the indicators remain mixed; momentum has ticked higher with today's action, stochastic is still strong in the upper signal zone but pointing lower. The index also set a new high for the rally and looks like it will continue higher, at least until reaching next resistance target near 4,880. A break above this level could take it up to 5,000.


The next strongest move in today's session was in the transports. The Dow Jones Transportation Average made a gain just over 1.18%, made a medium bodied white candle with lower shadow, and erased all of yesterday's losses. The move appears to confirm support below yesterday's close and could lead to further upside. The indicators remain strong but persist in showing signs of reversal, namely bearish crossovers, that could limit the amount of upside we get. First upside target is near 8,100, a break above this level could take it up to 8,400. Support remains below today's low, near 7,725.


The S&P 500 was the third biggest gainer in today's session, rising about 0.9% by end of day. The broad market created a long white candle, moving up from support, and set a new high for 2016. The indicators are mixed, both are showing near term weakness, but consistent with a rising market. Toda's moves appears to be the start of another move higher with upside target near 2,075.


Today's laggard was the Dow Jones Industrial Average which gained a little more than 0.55%. The index created a medium bodied white candle with lower shadow present, confirming support at the 17,500 level. Today's move is bullish and set a new high but just barely. The indicators are mixed in that momentum is waning but are still showing strength by trending high in overbought territory. This move could continue higher with upside target near 18,000 but I remain wary.


Janet Yellen, the FOMC, did it again. A fed induced rally driven by easy money policy has sparked a rally and taken the market higher. In the near term this is good news but the signals are mixed. While easy money policy is still the name of the game, and rate hikes are still the plan, the economy has weakened since the December meeting and have raised concerns over growth and inflation going forward. Not only that, it seems as if the committee is less on the same-page than ever before, not something to inspire confidence in our regulators ability to keep the economy on track.

Hopefully today's speech has taken some fear out of the market, it certainly seems so based on the VIX, but risks for equities remain. Not only is there a lot of data due out between now and the next FOMC meeting we are on the cusp of a fourth quarter of earnings declines. I can't help but fear a correction driven by poor earnings and remain cautious in my stance because of it. As for the data, I expect to see it continue to support the idea of slow recovery, healthy labor markets and the path of normalized fiscal policy, no matter how gradual it may be.

Do not forget about this week's data. Tomorrow is ADP employment but Friday will be the big market mover with NFP, unemployment and hourly earnings.

Until then, remember the trend!

Thomas Hughes


New Plays

Back to the Future

by Jim Brown

Click here to email Jim Brown
Editor's Note

3D printing companies have been undergoing growing pains after a surge into the market on a whirlwind of promise in 2013-2014. That promise was broken when technology did not move as fast as the stock prices. After a long period of discontent, that 3D technology has finally reached the point where it is being used to produce everyday items from jet engine parts to high performance running shoes. 3D Systems is the leader in this space.


NEW BULLISH Plays


DDD - 3-D Systems Corp - Company Profile

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

With a DDD trade at $15.60

Buy DDD shares, initial stop loss $13.50

Optional

Buy May $17 call, currently 95 cents, initial stop loss $13.50.




NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

Short Squeeze!

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday's dull market turned into a strong short squeeze for the Nasdaq and Russell. The lowest volume day of the year on Monday turned into a big squeeze for tech and biotech stocks. However, I thought the rally was still lackluster and the impending payroll reports may be weighing on investors. After Yellen's dovish comments today, I doubt any payroll number will be material to Fed direction unless it is near 300,000.

We lost the Windstream stock position this morning when it dipped below support at the open. The option position is still open.

If you notice on the chart below the Dow only returned to downtrend resistance and closed almost exactly at the 17,623 high close from March 21st. This is resistance but it is not strong resistance. That starts at 17,750.

Even if the market posts another gain on Wednesday, I doubt it will break through that next resistance band.




Current Portfolio





Current Position Changes


FTNT - Fortinet

The long position was opened with FTNT trade at $28.75.


GPRO - GoPro

The short position was entered at the open with a trade at $11.40.


WIN - Windstream

The long stock position was closed at the open with a trade at $7.10.
The long call position is still open.


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. See portfolio graphic for stop loss.

Optional

Long July $12 call, entry 55 cents. See portfolio graphic for stop loss.



DRII - Diamond Resorts Intl - Company Profile

Comments:

No specific news. DRII picked up speed with a 4% gain.

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.



FTNT - Fortinet Inc - Company Profile

Comments:

FTNT rebounded from support at $28 to trigger our entry into the position at $28.75. No news.

Original Trade Description: March 22nd.

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 $28.75

Buy FTNT shares, currently $28.53, see portfolio graphic for stop loss.

Optional:

Buy May $31 call, currently $1.30, see portfolio graphic for stop loss.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. Still fighting that resistance from the spinoff high back in October. Don't forget there is $2 billion in dividends and buybacks coming in June.

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.



KS - KapStone Paper - Company Profile

Comments:

No specific news but a 7.7% gain!

Original Trade Description: March 26th.

KapStone manufactures and sells containerboard, corrugated Products and specialty paper products in the U.S. and internationally. They are the 5th largest producer in the USA. The purchased Victory Packaging L.P. and its subsidiaries for $615 million back in June. As a result of the acquisition revenue for 2015 rose from $2.3 billion to $2.8 billion thanks to $582.9 million in revenue from Victory.

They own four paper mills, 21 plants and 65 distribution centers.

Earnings were a challenge for Q4 due to a 12-day strike at one of their paper mills. This reduced revenue because of a lack of product. Shares dropped from $14 to $9 on the news on February 10th. Shares have recovered from that dip and were up 70 cents on Thursday in a weak market. They failed to sell off earlier in the week when the market was down.

On March 10th they announced a 10 cent quarterly dividend payable April 13th to holders on March 30th. Earnings are May 2nd.

Shares are in a pretty decent uptrend and closed at $13.20 on Thursday. Resistance is $15.20. The high in November was $25. I believe they will at least reach resistance at $15 and with a decent market will move through that level to $17.

Position 3/28/16:

Long KS shares @ $13.15, see portfolio graphic for stop loss.

No option because of wide strikes.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. Another test of support at the open and then a strong rebound. The worst should be over.

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, see portfolio graphic for stop loss.

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:

No specific news. Maintain that $7.10 stop loss.

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

Closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

Optional

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




BEARISH Play Updates


DEPO - Depomed - Company Profile

Comments:

Shares rebounded with the Nasdaq short covering and the short covering in the biotech sector.

Maintain the stop loss at $14.25.

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, see portfolio graphic for stop loss.

No option recommendation because of wide spreads.



EGHT - 8X8 Inc - Company Profile

Comments:

Short covering spike to downtrend resistance. No news, purely Nasdaq related.

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, see portfolio graphic for stop loss.



GPRO - GoPro - Company Profile

Comments:

GoPro only rebounded 15 cents in a very strong Nasdaq short squeeze day. This is a good omen for future declines in the stock.

Original Trade Description: March 28th

GoPro develops hardware and software solutions associated with capturing, managing, sharing and enjoying engaging video content. Basically they make action cameras and had the market cornered for several years. That is no longer the case.

Analysts expect GoPro sales to decline -16% in 2016 compared to 15% growth in 2015 and 41% growth in 2014. The company has made numerous mistakes in execution and competitors caught up with them and some have passed GoPro in technology. The company expects to fix their sagging sales by discontinuing three cheaper models in 2016 and introduce the new Hero 5 camera sometime this year. They will also release the Karma drone and the Omni VR rig later this summer.

However, Kodak, Nikon, Ricoh, Nokia and 360Fly have already launched similar devices at cheaper prices than GoPro normally charges. Analysts claim the streamlined cameras from those manufacturers make GoPro cameras look bulky and clumsy. Nokia is selling an 8 camera VR device for $60,000 to professional filmmakers. GoPro is trying to market a 16 camera setup for $15,000 but the software is clunky and hard to use.

The bottom line here is that GoPro had the lead spot in the market and is in danger of losing it to major, well-funded competitors. Secondly, many analysts say the action camera market has become saturated and anyone that wanted one now has one.

Shares fell 7% today on the Nokia VR news. The closed at $11.50 with support at $10. That looks like a done deal given the choppy market and the downward trajectory on GoPro shares. With competition mounting, I would not be surprised to see GoPro set a new low.

Earnings are April 28th.

Position 3/29/16 with a GPRO trade at $11.40

Short GPRO shares @ $11.40, see portfolio graphic for stop loss.

Optional

Long May $11 put @ $1.17, see portfolio graphic for stop loss.





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