Tuesday's short squeeze was clearly a head fake and the gains were completely erased today. I recommended we not add any new plays on Tuesday because of the strong chance the short squeeze to resistance would fail. That was the right call and the decline now suggests we are headed to a lower low.
The S&P declined -20 points to close at 2,064 and well above support at 2,040. I have said for a couple weeks that I expected May markets to be choppy and this one certainly qualifies. The spike on Tuesday created another lower high and now the confirmation signal will be a lower low under 2,040.
The biotech sector declined more than 3% and well more than the broader markets. Semiconductors and retail sectors were also weak. The Dow had a lot of major decliners including IBM, V, WMT, GS, NKE, MCD, UNH, HD and DIS. All declined more than $1 and the last six were down more than $2 each.
Three more retailers report earnings on Thursday. Those are Dillard's, Kohl's and Nordstrom's. The outlook is not good and that could weigh further on the market.
Today's sell off should have damaged market sentiment. By erasing all but 5 points of the Dow's gain on Tuesday, it completely killed that temporary euphoria.
Current Position Changes
No Position Changes
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
BLMN - Bloomin Brands - Company Profile
No specific news. Minor decline in a weak market.
Original Trade Description: May 9th.
Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.
They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%.
Shares surged 9% despite the miss.
Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.
Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.
Long BLMN shares @ $19.71, initial stop loss $18.25.
No option recommendation due to wide spreads.
TRN - Trinity Industries - Company Profile
No specific news. Holding over support.
We have time to wait for a rally.
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.
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
No specific news.
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.
Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.
Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS
Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.
BEARISH Play Updates
GPRO - GoPro - Company Profile
No specific news.
Original Trade Description: May 5th.
GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.
GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.
They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.
The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.
Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.
Position 5/10/16 with a GPRO trade at $9.65
Short GPRO shares @ $9.65. See portfolio graphic for stop loss.
INSY - Insys Therapeutics - Company Profile
No specific news. The Biotech sector was down -3% again and far more than the broader markets.
Original Trade Description: May 4th.
Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.
They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.
The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.
Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.
While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.
Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.
Earnings July 28th.
Position 5/5/16 with an INSY trade at $13.60
Short INSY shares @ $13.60, initial stop loss $14.60
SQ - Square - Company Profile
Square dropped 3% ahead of Tuesday's IPO lockup expiration.
Original Trade Description: May 7th.
Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.
The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.
Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.
According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source
I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.
I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.
If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.
Long May $10 put @ 60 cents. No stop loss. (Corrected entry)
Long Jun $11 call @ 55 cents. No stop loss.
XLF - Financial ETF - ETF Profile
The ETF completely erased the gains from Tuesday but remains a log way from our $22 strike price. The May option will expire on the 20th.
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 slowly 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.
Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.
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