Option Investor

Daily Newsletter, Thursday, 3/31/2016

Table of Contents

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

Market Wrap

Resistance Reminder

by Jim Brown

Click here to email Jim Brown

Strong overhead resistance we have been watching for weeks held again and could be a preview of things to come.

Market Statistics

The Dow crashed into the resistance barrier on Wednesday with a very short term high at 17,790 on the opening gap. The Dow closed 76 points below that high. Today the Dow barely managed to edge over that 17,750 resistance level by only 5 points intraday before selling off again. I continue to believe that this will be major resistance. The range from 17,750 to 18,165 may only be 415 points but it is going to be a major roadblock to further gains.

The economic reports today did not help the bullish case. The Challenger Employment for March was slightly improved with layoffs declining from 61,599 in February to 48,207 in March. That March number is an improvement but it is still 32% higher than March 2015. For the entire first quarter, there were 184,920 announced job cuts, which was also 32% higher than the same period in 2015.

It was no surprise that energy layoffs the second highest sector at 7,747 with retail at the top with 8,490. Healthcare products cut 6,236, entertainment/leisure 6,212 and information technology at 5,003.

The weekly jobless claims rose +11,000 from 265,000 to 276,000. That is the third consecutive weekly gain. This could be a sign that job growth is slowing. The ADP Employment report on Wednesday showed a gain of 200,000 jobs, down slightly from the 214,000 in February.

The Nonfarm Payroll report on Friday is expected to show a gain of 205,000, down from 242,000 in February. That consensus number rose by 5,000 after the ADP report. March has a history of missing estimates by about 63,000 on average over the last decade. If the report did come in at 142,000 in line with the average miss, that would not be market friendly. In this case, bad news would actually be bad news now that the Fed is on hold until later in the year. A serious miss of the estimates would suggest the economy is declining and a recession is likely.

I am not expecting that large of a miss if there is a miss at all. The job market has been the strongest economic area for many months, even if most of the jobs are only part time service jobs.

The economy is declining as evidenced by the Atlanta Fed GDPNow real time GDP forecast for Q1. As of Monday the forecast is for +0.6% growth in Q1. That is down from 2.7% estimates in the middle of February. The forecast will be updated again on Friday after the payroll report and I will provide the update in the weekend commentary.

Minimal growth at 0.6% means the Fed will be on hold for a long time, at least until the second half of the year. Yellen's speech indicated the Fed would me more gradual in their rate hikes because of multiple factors in the U.S. economy and overseas.

Also on the calendar for Friday is the ISM Manufacturing Index for March. The estimate has risen back into expansion territory at 51 from the prior forecast of 49.5 from last week. Unfortunately, construction spending has declined from +0.2% to flat at 0.0% over the last week and Consumer Sentiment estimates have fallen -1.0 points to 90.5. All of these factors will weigh on the GDP forecast.

It was a disappointing day for Starwood Hotels (HOT). After two weeks of bidding on the acquisition of Starwood, the Anbang consortium withdrew their $14 billion all cash offer for the hotel chain. Starwood immediately reaffirmed their $13.3 billion deal with Marriott (MAR). The transaction will create the largest hotel chain in the world. The acquisition is expected to create $250 million in cost synergies and significant revenue synergies as the two firms cross-pollinate their existing customer lists and rewards programs. Starwood will hold a special shareholder meeting on April 8th to approve the sale.

The last Anbang offer was for $82.75 and all cash. There were growing concerns about their ability to raise the cash and whether or not they could get government approval for a Chinese consortium to own hotels outside U.S. military and government locations. There were growing concerns the internet and WiFi connections could be compromised to the benefit of Chinese owners. Current shareholders will receive a combination of cash and stock equal to $77.94 per share. Separately, they will receive shares in Interval Leisure Group (IILG) common stock when the entity is spun off from Starwood. That is currently valued at $6.13 per Starwood share making the total price to shareholders about $84.07 per share. Starwood has 1,300 properties in 100 countries. Shares declined -$3.50 in afterhours to $80.

Tesla (TSLA) shares were up strongly intraday but faded at the close on a sell the news trade. Tesla is unveiling the Model 3 tonight, which will sell for $35,000. Thousands of people have been waiting in line outside Tesla dealerships for days to put down a refundable $1,000 deposit and be first in line for the new cars. These are expected to begin delivering late in 2017. There is also a federal $7,500 tax credit for buying an electric car and some states offer credits as well. The unveiling is scheduled to occur at 8:30 PT tonight. Customers can also order online starting at 7:30 PT, an hour earlier than planned because of the strong demand. If the car is even halfway decent, Tesla could see major demand and waiting periods of a couple years.

It is not too late for Apple to buy Tesla and jumpstart their smart car project. Tesla's market cap of $30 billion is pocket change compared to Apple's cash hoard of $215 billion. They could pay a premium and still have $160 billion left. Elon Musk has had conversations with Apple in the past.

Target (TGT) was downgraded from buy to sell at Barclays and the price target was cut from $90 to $70 after Wednesday's close at $83.60. The analyst said Target guidance on same store sales and margin expansion are overly optimistic while it faces extreme competition from general merchandise stores and online competitors. Numerous analysts disagreed with the Barclay's downgrade. Last year Target had revenue of $73.8 billion with a 34% increase in e-commerce sales in Q4 alone. Operating margins were 7% and the highest level since 2013. Management is expecting 2.5% same store sales growth in 2016 compared to +0.5% at Walmart. Earnings are expected to grow 11-15% to $5.20-$5.40 per share. Target is expected to grow earnings at 11% a year for the next five years. Shares declined -$1.32 on the news but once they move over resistance at $84 I would be a buyer.

Medivation (MDVN) says it has no plans to sell but has hired JP Morgan (JPM) to handle inquires from potential buyers and suggest defensive measures. Medivation only has one drug on the market, prostrate drug Xtandi, and Bernie Sanders warned the drug was developed with government money and could be taken from the company and marketed at a lower price. That is not likely to happen. The company does have a pipeline of drugs that are expected to do well. One is a breast cancer drug and the other a blood cancer drug. A Jefferies analyst said a best case for a Medivation buyer would be in the $51-$54 per share range. However, if the company can hold out until it gets approval for its current drugs that jumps to $71-$75 per share. Shares spiked 23% on the news.

The first quarter is over and the Dow managed its biggest quarterly comeback since 1933. The S&P gained a measly 0.8% in Q1 and the Dow added +1.5%. However, that was a +14% rebound from the February lows. Since the Feb 11th low at 15,503 to Wednesday's high at 17,790 the Dow added +2,287 points.

The Nasdaq lost -2.8% for the quarter despite a 6.8% rebound thanks to the crash in biotechs. Gold had its best quarter since 1986 with a 16.5% rally. Crude oil rallied from a low of $26.05 to a high of $41.90 in late March for a 61% rebound. You can thank the rebound in oil for much of the gains in the Dow and S&P.

You can also thank the drop in the dollar for the rebounds in oil and gold. The dollar suffered its worst quarterly drop in five years. That means it takes more dollars to buy an ounce of gold or barrel of oil.

The $38.50 level on oil is prior resistance and it is acting as a price magnet ahead of the April 17th OPEC meeting in Doha Qatar. Crude prices have been fading since it is now clear Iran and Libya will not be a part of any agreement. Also, any agreement will not have any effect on the current oil glut. A decline in oil after the meeting could prevent the equity markets from rising through current resistance.

The yield on the ten-year declined -2.4% today to 1.78% and nearing a multiyear low. Yellen's cautions about economic conditions here and overseas caused a flight to quality that could continue for some time. A weak nonfarm payroll number on Friday could accelerate this decline. While recession fears have abated over the last month, they still exist.

We are rapidly heading into earnings season with earnings expected to decline -8.7% according to FactSet. However, Tom Lee of Fundstrat Global Advisors believes there is a rally ahead. Lee believes the pessimism is vastly overdone. When those estimates were being produced earlier in the quarter and companies were issuing guidance, oil was under $30 and the dollar was a lot higher. With the dollar a major impact to corporate earnings, most companies were projecting continued dollar strength into their guidance. Since January 29th the Dollar Index has declined -5.1% with the dollar closing at a five-month low today.

Lee believes estimates are too bearish and when companies begin beating those earnings there will be a race to buy stocks. He also pointed to the more than $1 trillion in short positions as rocket fuel once prices begin to rise again. That is more stocks short than in March of 2009 at the height of the market crash. Lee expects a new high on the S&P by the end of May. Let's hope he is right. The last high of 2,130.82 was on May 21st last year.

April is actually a bullish month for the markets. Typically, stocks rise ahead of earnings as investors make bullish bets on earnings reports. Over the last ten years, there has not been a loss for the month for the Dow. The average Dow gain is 2.8% in April and the S&P averages +2.62%. Since 1945, the Dow has been positive 69% of the time with an average 1.41% gain. Since past performance is no guarantee of future results, you have to take those statistics with a dose of reality. We are facing major resistance in a hotly contested election cycle with U.S. economics declining and Q1 earnings results in doubt. All of those factors could become bricks in a wall of worry for the market to climb or they could become weights to hold the market back.


The S&P has not yet reached the strong resistance that begins at 2,075, with 2,072 the high on Wednesday. The index is facing strong resistance and we will need a significant catalyst to push through the various levels. It is not impossible but it should be difficult. My problem is that I do not see a material positive catalyst on the horizon other than the potential for better than expected earnings. With economic estimates declining we could also rally if that situation were to improve but it will take more than one report to change the outlook. It will take several weeks of positive economic news to suggest a real improvement.

On the positive side, the Chinese markets are improving. That suggests economic conditions are also improving although we do not have confirmation of that just yet. While the Shanghai Composite is rebounding, it faces several resistance tests. The ECB is preparing to kick off a larger round of QE and that could depress rates further and force more money into equities.

In the U.S., the markets were slipping to their lows for the day at 3:00 when a flood of market on close buy orders appeared to the tune of $1.2 billion. The losses were erased and the indexes turned positive until just before the close when a surge of sell orders erased that buy imbalance. That could have been quarter end adjustments by funds or any number of events. We should not judge the market by the last 30 min of trading on the last day of the quarter.

The payroll report in the morning should not be a market mover. The Fed is on hold. Unless the number is off significantly in either direction, it should be ignored. Actually, the goldilocks number would be around 200,000 and that would not bring the Fed back into the picture or suggest the economy was weakening further.

The S&P would have to gain 15 points just to reach that initial resistance at 2,075. That suggests we are not going to break into that resistance band on Friday. Making large investments ahead of a weekend is rarely a good idea. There will be plenty of time on Monday to put quarter end funds to work.

The Dow benefitted from an upgrade on IBM by Morgan Stanley. The broker raised the price target to $168. That was good for a $3 gain on IBM and +23 Dow points, which prevented an even bigger loss at the close.

The Dow has touched resistance at 17,750 for the last two days and each day resulted in selling when that number was touched. It will take a significant catalyst to punch through that initial resistance level.

The Nasdaq is facing significant resistance at the 4,900 level but once through it has a clear shot to 5,100-5,160 and the historic highs. Whether that will happen or not probably depends on the Biotech Index. The $BTK gained +3% today and the Nasdaq barely closed positive.

The biotech sector could be poised for a rebound. The index rebounded to resistance at 3,000 once again after touching support at 2,800 on Tuesday. Since the sector is heavily shorted, any breakout over 3,000 could be powerful.

The Russell 2000 actually moved to a higher high today with a close at 1,114. Resistance is 1,120 and the 50% Fib retracement level. The 200-day is 1,141 and major resistance waits at 1,161. However, the index is moving with the support of the biotech sector and a rally in biotechs would push the Russell much higher. The relative strength oscillators have both improved.

I am not expecting much from the market on Friday. Next week could produce some fireworks as the quarter end money is put to work but it will be interesting to see how the indexes react to the various resistance levels. I would love to believe Tom Lee and see us set new highs in May but that is just a remote hope today. There are far more analysts that believe the resistance will hold and we will head lower into the summer. That does not mean we are not going higher over the next couple weeks. It may be choppy and on low volume. The super low volume over the last two weeks demonstrates a lack of conviction by traders on both sides. I seriously doubt that conviction is going to improve suddenly but I would be thrilled if it did.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Know When to Hold Them

by Jim Brown

Click here to email Jim Brown
Editor's Note

Investing is like gambling. Sometimes you need to know when to hold and when to fold. With significant resistance just overhead and the payroll report and ISM Manufacturing the two major headlines the market could go in either direction or do nothing at all depending on the economic numbers.

Our portfolio is firmly weighted to the upside and with strong resistance on the Dow being tested daily and holding, there is a decent chance Friday will be a profit-taking day. While I cannot guarantee that, I would rather wait until the weekend to add new plays.

There is always another day to trade if you have cash in your account. We should only trade if we have a better than 50:50 chance on being successful.

Friday is a day for us to hold the cards we already have.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Resistance Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow, S&P and Nasdaq all posted lower highs and the Nasdaq was the only index to post a gain but it was fractional. The resistance held or at least scared off investors that may have been interested in adding to positions at the end of the quarter.

The Biotech Index rallied 3.15% or 90 points to keep the Nasdaq and Russell positive for the day. Were it not for the $BTK the outcome would have been a lot different.

FTNT was the big gainer today at +$1.23 and GoPro the big loser at -.20. Obviously, it was a very slow day.

Current Portfolio

Current Position Changes


The long position was opened with SPXC trade at $15.05.

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


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.


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

DDD - 3-D Systems Corp - Company Profile


3D still fighting resistance at $15.45. No news.

Original Trade Description: March 29th.

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.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, See portfolio graphic for stop loss.

Long May $17 call @ $1.05, See portfolio graphic for stop loss.

DRII - Diamond Resorts Intl - Company Profile


No specific news. Nice gain and back over initial resistance.

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


Big 4% gain to close over resistance at $30. 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.


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

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Now fighting resistance at $18. 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


Now fighting resistance at $14. Standpoint research initiated coverage with a buy rating.

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.

SPXC - SPX Corporation - Company Profile


Shares moved over $15.05 intraday to trigger the position. The $15 level was resistance. If shares can continue higher we could see some short covering.

Original Trade Description: March 30th

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 26th.

Position 3/31/16 with a trade at $15.05

Long SPXC shares @15.05, initial stop loss $13.25

No options because of wide spreads.

TRN - Trinity Industries - Company Profile


No specific news.

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.


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


No specific news. No stop loss on the option.

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

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

BEARISH Play Updates

DEPO - Depomed - Company Profile


Shares came within 8 cents of our stop loss. There is decent resistance at $14 that is preventing a rebound.

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


Came within 9 cents of our stop loss at $10.25. The company was awarded four patents related to communications technologies. We may be in trouble here but the stock did give back its gains and closed with a minor loss.

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


GoPro posted a minor decline and that was good since there was no follow through on Wednesday's rebound. Maintain the stop loss at $12.55.

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.


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

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