Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/12/2016

Table of Contents

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

Market Wrap

Thank You Russia

by Jim Brown

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The news powering the market today came from Russia's Interfax news service claiming Russia and Saudi Arabia had agreed to freeze production even if Iran stays out. The report was unconfirmed.

Market Statistics

Crude prices exploded higher to close at $42 and a four-month high on a "rumor" those two oil producers have agreed. You may remember last week when the deputy crown prince Mohammad bin Salman Al Saud said Saudi would only participate in a production freeze if "major producers, including Iran, also participate." Obviously, he could have changed his mind but there are dozens of news articles, comments and quotes over the last three weeks that confirm his position.

The biggest point to this entire dog and pony show is that freezing production at the current level still leaves 1.45 million barrel per day in excess production and that number is growing daily as Iran, Libya and Iraq continue to ramp up production. Those three countries have already said they would not participate in the freeze.

The key here is that the OPEC leaders and Russia have figured out how to spam the headlines with positive comments in order to boost oil prices. Eventually gullible investors are going to realize that global inventories are continuing to grow and prices will decline. John Kilduff, a partner at Again Capital and energy analyst said "This could be the mother of all buy-the-rumor, sell-the-news events."

For today, the spike in oil prices to $42.17 caused a major short squeeze in energy equities. That squeeze carried over into the broader market and we saw the major indexes return to prior resistance levels.


Short squeeze examples from the energy sector.





The oil story captured a lot of headlines because there were not a lot other news events to capture attention. The NFIB Small Business Survey for March declined slightly from 92.9 to 92.6. This was the third consecutive monthly decline and well below the 96.0 reading in October. Of the ten component categories, only two posted a gain and that was plans to increase capital expenditures and improving credit conditions. Analysts blamed unrest in financial markets as the reason for the continued decline in small business sentiment.

Import prices for March rose +0.2% after a -0.4% decline in February. Analysts were expecting a +1.2% rise. However, if you exclude oil imports, prices declined -0.2%. If you exclude autos prices declined -0.3%. Petroleum product prices rose 6.5%. Export prices were flat after a -0.5% decline in February.

The only real surprise for the day came from the Treasury Budget for March. The deficit was -$108.0 billion compared to -$192.6 billion in February. That compares to -$52.9 billion in March 2015. Government revenues declined -2.7% to $227.8 billion while spending increased +17% to $335.9 billion. So far, in fiscal 2016 the government has incurred a cumulative deficit of $461 billion. Individual income taxes fell -10.3% because of the drop in full time jobs and sharp increase in lower wage part time jobs. Self-employment tax receipts declined -3%. Medicare spending rose 87.2% with Medicaid spending up 14.7% because of the Affordable Care Act. Interest payments on the debt rose 51.8%.

Wednesday is a big day for economics with the Retail Sales for March and the Fed Beige Book. The retail sales for March could easily disappoint with multiple retailers warning about Q1 results. The Fed Beige Book should not be a problem for the market unless several of the regions report declining economic conditions.


Starbucks (SBUX) needed some extra caffeine this morning after being downgraded by Deutsche Bank from buy to hold. The bank said customer traffic might slow after the company changed its loyalty program last month. Starbucks changed the program to reward customers on dollars spent rather than store visits completed. The program offers free food and drinks after they spend money in the stores. Currently customers are awarded 2 stars for every dollar spent. That was a change from receiving one star for every visit regardless of the money spent. Under the old system you received a free food item for every 12 stars accumulated. Under the new system, you have to accumulate 125 stars ($62.50 in spending) to reach the same benefit level. At the end of December, there were 11.1 million rewards customers, up 50% over the last two years. The analyst said the stock was fully valued and cut his price target to $64.


L Brands (LB) was downgraded by Goldman Sachs (GS) from buy to neutral. They also removed the company from their conviction buy list. They lowered the price target from $115 to $91. The downgrade came on worries about the current restructuring process that will split the organization into three business units, Lingerie, PINK and Secret Beauty. Goldman said the split could cause near term sales growth to slow.


Horizon Pharma (HZNP) shares fell -26% after the company provided disappointing guidance. The company reiterated the guidance from January for revenue of $1.025 billion to $1.050 billion and EBITDA of $505-$520 million. However, they pushed out the expectations for this not to happen until later in the year. Q1 guidance is only expected to bring in 19-20% of the total with 22-23% in Q2 and 57-59% in the second half. Approximately 64-66% of EBITDA is not expected until the second half. Investors do not like delays and revenue shifts. Shares crashed on the news.


Integrated Device Technology (IDTI) shares rallied as much as 23% on a reported buyout bid for $32 a share in cash. That would have been a 65% premium to Monday's close. However, almost immediately the purported bid began to be questioned. There were some analysts claiming it was a "fakeover" bid similar to one made on another company in 2015. Someone uploaded a fake 13D document to the SEC website just to spike the price. Tuesday's reported bid from a group of investors led by Libin Sun could not be verified. Even if the bid was real there is a good chance the government would not approve it. Libin Sun owns 4.4 million shares. The 13D uploaded for IDTI said the bid was nonbinding and included a go-shop provision. We should know in 24 hours if the bid is real. IDTI and the SEC declined to comment on the filing. Shares dropped back to only a 4% gain on the questions over legitimacy.

A brave investor could buy the May $21 calls for $1.00 in case the bid turns out to be real.


Facebook (FB) kicked off its developer's forum and there was plenty of hype. The company said it was going to promote its Messenger platform as a way to sell products over the Internet and offer customers support. Currently users send 60 billion messages a day. Zuckerberg spent a lot of time in his keynote speech talking about bridging borders and expanding the Internet to everyone, everywhere. Of the 2,600 developers in attendance one-third were from other countries.

Zuckerberg talked about using lasers and drones to make the Internet available to everyone. With 7.1 billion people in the world, more than half do not have Internet access. He talked about using virtual reality to bring friends together using a pair of normal looking glasses. He has been spending a lot of time in China and India in an effort to bring those 2.5 billion people online with Facebook. Neither country allows Facebook. India just rebuffed his offer to supply free Internet along with a limited Facebook to their population.

Eventually China and India will concede and allow some form of Facebook into their borders. This is why you have to have a position in Facebook at all times. One morning we are going to wake up to an announcement that China has agreed to let Facebook in and the monthly active users will jump by one billion almost immediately. Recently some analysts have started to cut estimates on Facebook saying it has peaked. While user growth may have slowed, it is far from peaked. Users could actually double when, not if, he is successful in getting the product into China and India.


Chipotle Mexican Grill (CMG) is expected to report its first quarterly loss ever for Q1. They are expected to report a 29% drop in same store sales after their multiple food contamination issues in prior months. Also, customer traffic is expected to have declined -26%. Long time customers may have become accustomed to eating elsewhere after they avoided Chipotle during the period where the food scare was active. In order to counter the declining traffic Chipotle handed out 26 million coupons for a free burrito. This will also impact their margins as those customers redeemed those coupons. They report earnings on April 26th. There is actually a chance for either a surprise beat or more likely a "kitchen sink" quarter. Since they know the estimates are lousy, they could throw all the bad stuff into this report to clear the runway for future quarters.


After the bell, CSX Corp (CSX) reported earnings of 37 cents that matched estimates. Revenue of $2.62 billion declined -14% and missed estimates for $2.68 billion. Coal shipments declined -33% dragging total traffic lower by -6.5%. CEO Michael Ward said the railroad was parking locomotives and unused cars and reducing employees until conditions improved. He also said the intermodal business rose 11% because of the severe driver shortage for over the road trucks. To combat this, the truck lines are shipping more trailers by rail and using their drivers to pick up and deliver from the rail yards. The earnings were not as bad as some expected and shares were flat in afterhours.


Also after the bell, Valeant (VRX) got some bad news. Last week the company reported a deal with bondholders to postpone a potential technical default event by gaining approval for a late filing of their 10K. Tonight Centerbridge Partners sent Valeant a notice saying they intend to call a default. This means Valeant will have 60 days to file its annual report or be forced to repay what it owes Centerbridge before that 60 days expires. Reportedly Valeant owes Centerbridge $250 million. If Valeant were to default on those bonds, it would trigger default provisions in the other $32 billion it owes to other creditors. Valeant said the notice does not change anything. They plan to file the 10K by April 29th even though they have an agreement with creditors for a May 31st deadline. Analysts said the move by Centerbridge could be an attempt to win additional concessions in negotiations with Valeant. Lenders have used these tactics for decades to leverage their position. Centerbridge may have given notice simply to insure Valeant does what it has promised in producing the reports in a timely manner. Valeant shares were down $1 in afterhours.


The Q1 earnings cycle kicks off for real in the morning with Dow component JP Morgan reporting before the open. JPM is the first of the top 5 banks reporting over the next five days. These earnings have the potential to set the tone for the entire quarter.

Q1 earnings are still expected to decline -9.1% and the biggest quarterly decline since Q1-2009. On the S&P 121 companies issued guidance and 78% guided lower. Estimates for Q2 are for a -2.7% decline, Q3 +3.8% growth and Q4 +11% growth. Obviously if the market can get through the Q1 earnings with any kind of improvement from the estimates, we will see investors start to load up on stocks ahead of the second half of 2016. Whether that happens in May or July remains to be seen.

Today's short squeeze could continue a long way if there was something to power it higher. As much as 4.5% of the float of the U.S. markets is short. That is near record levels. The short interest in the SPY is at record levels. Globally there is $12 trillion sitting in cash in investor accounts. If an economic rebound broke out there would be a monster rally in equities.

Markets

In order for the short squeeze to continue, we have to break through that monster resistance above the Dow and S&P. The S&P close at 2,062 was right at initial resistance but it has 13 points it has to scale to reach the real resistance that starts at 2,075. Just getting there will be a challenge and getting through the multiple resistance levels to make a new high at 2,132 would be a serious undertaking.

I am not going to write a book about the resistance challenge because I have written about it every day for the last three weeks. Support is now 2,042 and resistance 2,062 and 2,075.


All 30 Dow components were positive today and that is a rare occurrence. Chevron led the pack because of the oil story. Tomorrow JP Morgan will lead and probably determine the direction. Resistance on the Dow begins at 17,750 through 17,925. That is going to be a tough minefield to cross. Support is about 17,550. The Dow has moved almost perfectly sideways for almost a month. That next 80 points is going to be a challenge.




The Nasdaq came to a dead stop at 4,900 last week and has failed to return to that level in the last four sessions. The short squeeze in the biotech sector ended and today the semiconductor sector was negative. Every day it is a different drag but next week the big techs begin to report and the gains/losses will be headline driven.

The morning drop today to 4,808 broke through the recent support at 4,835 but the rebound was quick. The index ended the day right in the middle of its recent range after making that lower high, lower low for the day.



The Russell 2000 remains stuck below resistance at 1,110 but turned in a respectable day with an 11-point gain. The Russell remains captive to the biotech sector, financials, semiconductors and energy stocks. Those energy stocks offset the losses in the other sectors on Tuesday.


Tomorrow is all about earnings and oil. The API inventories tonight showed a 6.2 million barrel build and WTI traded about 70 cents lower at $41.50 but then stabilized to wait on the EIA numbers on Wednesday morning. Cushing inventories declined -1.5 million barrels because the 590,000 bpd Keystone pipeline was halted for seven days. That pipeline flows into Cushing Oklahoma. However, we should see the EIA inventories build because of the backlog of tankers waiting to unload in Houston after those fog closures of the Houston ship channel the prior two weeks. Even if the EIA inventories show a big build as expected, the price of crude will probably not decline much because everyone is waiting for some miracle in Doha this Sunday.

The S&P futures have not declined tonight. They have been flat to slightly positive and after a big short squeeze like today, they would normally be down several points. There is a lot of darkness before the dawn so anything is still possible.

I am neutral on the market for Wednesday because it will be headline driven with earnings and economics. I am bearish on the market in the days ahead because of the strong resistance. However, if the first few companies to report, beat the street estimates and rally then we could easily see a longer term short squeeze because of that strong resistance. As the indexes pass through it, those short at those levels will be forced to cover.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Calendar Shrinking

by Jim Brown

Click here to email Jim Brown
Editor's Note

The calendar of upcoming events for this company is shrinking and cash flow could be a challenge. Lions Gate has always been a feast or famine company. They shoot up when a big movie is coming and collapse when that movie arrives. Their upcoming calendar is devoid of any major hits in the near future.


NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


LGF - Lions Gate Entertainment - Company Profile

Lions Gate Entertainment engages in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and sales activities. They produced the series Twilight, Hunger Games and Divergent along with dozens of other films.

Shares have been falling since the Hunger Games and Divergent movies have run their course. The last Divergent movie, "Allegiant" only produced $137 million in worldwide ticket sales and was considered a disappointment.

The company has other films in progress but none are expected to be the box office draws like the ones mentioned above. There was a report last week that Lions Gate may be looking to partner with another studio and may be looking at buying a minority interest in Paramount. That would be a good deal for Lions Gate since Paramount owns Transformers, Mission Impossible and Star Trek. However at the 25-35% stake being discussed that would be roughly $2 billion and a big bite for Lions Gate at a time when future cash flows may be shrinking.

Lions Gate has not been one to shy away from acquisitions. They have done several in the past and that is how they got the Hunger Games and Twilight franchises when they purchased Summit Entertainment. They even tried to buy MGM in 2010 but failed.

Knowing that Lions Gate is on the prowl for an acquisition and has no major movies in the pipeline has put the stock into a slide.

Earnings are May 10th.

I am recommending we short LGF with a trade at $19.65 and look for them to set a new low on any acquisition announcement. Normally the acquirer shares go down. Even if they do not make an acquisition we know they are looking so investors are getting out of the way now.

With a LGF trade at $19.65

Short LGF shares, initial stop loss $20.65

Optional

Buy May $19 put, currently 80 cents, stop loss $20.65.





In Play Updates and Reviews

Trend Changed

by Jim Brown

Click here to email Jim Brown

Editors Note:

We did get a trend change and hopefully it is not a one-day wonder. I requested a trend change in the Monday commentary and one appeared. Unfortunately, it was just a short squeeze brought on by the spike in crude oil prices. This lifted the energy sector and the financial sector. The market started off with a minor uptick but then drifted back to negative territory before deciding to move higher as crude crossed the $42 level.

The Nasdaq had a nasty dip at the open but eventually rebounded to close up +38 points. Biotechs also dipped at the open before rebounding to a small gain.

The biotech dip knocked us out of FGEN and the Juniper earnings warning knocked us out of FTNT and HPE.

The Dow stopped just short of strong resistance at 17,750 so Wednesday should be interesting. The S&P is about 14 points below strong resistance beginning at 2,075.




Current Portfolio





Current Position Changes


ORBC - Orbcomm

The long position remains unopened until ORBC trades at $10.50.


XLF - Financial ETF

The strangle position on the XLF was entered at the open at $22.17.


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


CLDX - Celldex Therapeutics - Company Profile

Comments:

No specific news.

Original Trade Description: April 5th.

Celldex Therapeutics is a biopharmaceutical company that develops, manufactures, and commercializes novel therapeutics for human health care in the United States.

That could be the opening sentence for almost any biotech company in the USA. They have multiple cancer drugs in trials and they have a drug for breast cancer in a registration trials after already passing through the gauntlet of multiple clinical trials.

Earnings are May 4th.

The stock was starting to recover from a long-term decline until a brain cancer drug failed a clinical trial and shares collapsed from $8 to $3. Now after a month of consolidation shares are starting to move higher again.

In biotech stocks with bad news, traders tend to over sell the news. The stock crashes to some ridiculous low and then languishes there for a while until all the existing owners get fed up due to the lack of a bounce and leave. New investors seeing a bargain and the opportunity to get in at a ridiculous low begin to accumulate the stock. I believe that is what we are seeing now.

This is really a play on the potential for a rebound in the biotech sector rather than some outstanding CLDX quality. I believe the stock is oversold and it has been rising for the last four days along with the biotech sector. If the sector continues to rise as I expect we should see CLDX rise as well as the penny stock investors begin to load up on an oversold opportunity.

Shares hit $4.65 today before fading with the market. I am recommending we buy a trade at $4.75 with a stop at $3.25. I will raise that stop rapidly if the trade begins to stall.

Position 4/6/16 with a CLDX trade at $4.75

Long CLDX shares @ $4.75, see portfolio graphic for stop loss.

Optional

Long May $5 call @ 50 cents. No stop loss.



DDD - 3-D Systems Corp - Company Profile

Comments:

New nine-month high. Polar 3D acquired STEAMtrax from 3D Systems. No price was given. 3D also announced it had developed a standardized curriculum for Bronchosphy in collaboration with the American College of Chest Physicians. The course provides hands on experience to develop doctor skill in a virtual reality training simulator.

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.
Optional

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



FGEN - Fibrogen - Company Profile

Comments:

FGEN dropped to $19.78 intraday to stop us out at $20.25. There was no news. Most biotechs dropped at the open before regaining ground later in the day.

Original Trade Description: April 2nd.

FibroGen is a research-based pharmaceutical company that discovers, develops and commercializes therapeutic agents to treat serious unmet medical needs. They have multiple drugs in the pipeline and they have collaboration agreements with Astellas Pharma and AstraZenaca (AZN).

Some of the drugs in process include roxadustat, or FG-4592, an oral small molecule inhibitor of hypoxia inducible factor prolyl hydroxylases (HIF-PHs) that is in Phase III clinical development for the treatment of anemia in chronic kidney disease; FG-3019, a monoclonal antibody in Phase II clinical development for the treatment of idiopathic pulmonary fibrosis, pancreatic cancer, and liver fibrosis; and FG-5200 for the treatment of corneal blindness resulting from partial thickness corneal damage.

Fibrogen and its partners are currently conducting seven Phase 3 trials on roxadustat for registration in the US, EU, China and other countries. A Phase 2 study for FG-3019 is underway on patients with inoperable Stage 3 pancreatic cancer. The company has completed funding its portion of research on roxadustat and AstraZenaca and Astellas are responsible for all further expenses until the drug is approved. This reduces significantly the drain on cash from Fibrogen. Cash on hand at the end of the quarter was $337 million. Fibrogen has multiple pathways to success with the multiple drugs in progress.

Earnings are May 10th.

Shares plunged on January 1st with the biotech sector and have traced almost exactly the same chart pattern as the Biotech Index. Friday's close on FGEN was a two-month high. Resistance at $21 appears to be breaking.

I am recommending we buy FGEN shares on a move over Friday's high. Once over that level there is limited resistance until the $30 range.

Position 4/4/16 with a FGEN trade at $21.75

Closed 4/12/16: Long FGEN shares @ $21.75, exit $20.35, -1.50 loss.



FTNT - Fortinet Inc - Company Profile

Comments:

The earnings warning by Juniper Systems after the close on Monday knocked all the stocks in the sector down at the open. FTNT dropped 5% in the first 5 minutes due to the warning. We were stopped out at $29.54 on the gap down even though our stop loss was $29.85.

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 26th.

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

Position 3/29/16 with a FTNT trade at $28.75

Closed 4/12/16: Long FTNT shares @ 28.75, exit $29.54, +.79 gain.

Optional:

Closed 4/12/16: Long May $31 call @ $1.10, exit .79, -.31 loss.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Juniper's earnings knocked HPE for a -3% loss and stopped us out at the new stop of $17.36 that was set on Monday. We will play HPE again as soon as the market settles into a trend.

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:

Closed 4/12/16: Long HPE shares @ $16.36, exit $17.36, +$1.00 gain.



ORBC - Orbcomm Inc - Company Profile

Comments:

ORBC dropped sharply at the open after they announced they were buying Skygistics Ltd. Based outside Johannesburg, South Africa, Skygistics provides a broad range of satellite and cellular tracking options as well as a broad range of telematics solutions centered around the management of remote and mobile assets to more than 250 telematics and enterprise customers. This is exactly what Orbcomm does and Skygistics will add distribution in some of the fastest growing M2M and IoT markets, including South Africa and 22 other African nations.

I see this as a big plus for Orbcomm and I feel even better about buying this position on a breakout.

The position remains unopened until ORBC trades at $10.50.

Original Trade Description: April 5th.

Orbcomm provides machine-to-machine (M2M) and internet of things (IoT) solutions in the U.S., South America, Japan, Europe and internationally. Customers are able to track and manage fixed and mobile assets. They also provide satellite automatic identification service (AIS) for vessel navigation. Orbcomm has its own constellation of 41 low earth orbit satellites. Communication can also be handled through terrestrial based cellular network services.

Basically, Orbcomm can track anything and communicate with anything that is Internet, Cellular or GPS enabled. Companies use Orbcomm devices to track refrigerated trucks and trailers while monitoring temperatures of those vehicles. Orbcomm can track and monitor engine performance, locations, operating time, etc on over the road trucks, earth moving equipment, trailers on trains, containers on ships, etc.

Orbcomm added 239,000 connected devices in Q4 alone. Total installed and billable communicators rose from 976,000 at the end of 2014 to 1,569,000 at the end of 2015. On December 21st Orbcomm successfully launched 11 second generation OG2 satellites from Cape Canaveral and after testing all satellites went live on March 1st.

Large fleet customers are signing up for the Orbcomm service faster than the devices can be installed. Growth is accelerating faster than the 61% increase in 2015. Current high profile customers include Caterpillar, Hitachi Construction, John Deere, Komatsu, Volvo, C&S Wholesale, Canadian National Railway, Hub Group, KLM Transport, Marten Transport, Swift Transportation, Target, Tropicana, Tyson Foods, Walmart, Union Pacific Railroad, Werner Enterprises and hundreds more.

Earnings last quarter were only a penny because of the high cost of satellite launches. They also acquired three companies, Skywave, InSync and WAM Technologies.

Earnings are May 5th.

Shares of ORBC have been erratic over the last four months. As they announce successful satellite launches, new Fortune 100 customers, etc the stock spikes and then goes dormant for a week or two until the next announcement. Most traders have never heard of the company so every press release introduces ORBC to a new segment of investors. I know the stock looks over extended but I believe they are in a growth phase that will continue.

I am recommending we buy ORBC on a breakout over $10.50 with a stop loss at $8.75. One analyst last week was talking about $25 now that the satellite expansion phase was complete and the M2M and IoT applications were becoming a reality.

With ORBC trade at $10.50

Buy ORBC shares, initial stop loss $8.75

No options because of wide spreads.



SPXC - SPX Corporation - Company Profile

Comments:

Another new 7 month high. No specific news.

Target $16.65 for an exit.

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, see portfolio graphic for stop loss.

No options because of wide spreads.



TRN - Trinity Industries - Company Profile

Comments:

Finally a nice rebound from that support at $18. We will not be exiting before earnings. We have a long way to go to get back over $20 but we have a July call option so plenty of time.

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 April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.



WIN - Windstream Holdings - Company Profile

Comments:

Windstream announced deployment of the Infinera Cloud Express for high speed connections between data centers in Chicago. They offer 500 gigabit per second bandwidth at for distances up to 600 kilometers and can be provisioned in 100 gigabit increments.

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


VXX - VIX Futures ETF - ETF Profile

Comments:

The big short squeeze caused the volatility to collapse slightly but as we move into resistance on the S&P we should expect to see some significantly volatile days.

Original Trade Description: April 9th.

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

The VXX touched 17 last Monday and that was a seven-month low. I think the odds of the VXX returning to 21-22 are excellent and returning to 25 reasonably good. Going long the VXX will be a hedge against out long stock positions.

Position 4/11/16

Long VXX shares @ $18.15. Initial stop loss $16.75.

No options because of high premiums.



XLF - Financial ETF - ETF Profile

Comments:

The financial sector rallied slightly on Tuesday as the rebound in oil prices took some of the pressure off the potential for loan defaults on energy loans. JPM kicks off the big bank earnings on Wednesday morning so it could get exciting.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slow and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.





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