Option Investor
Newsletter

Daily Newsletter, Monday, 5/16/2016

Table of Contents

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

Market Wrap

Buffet, Oil Spark Rebound

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market rebound today following news Warren Buffet bought a $1 billion stake in Apple, rising oil prices helped too. The new stake, about 10 million shares, was purchased during the first quarter and is already showing a near $200 million loss, helped restore confidence in the tech giant which gained over 4% in today's session. Aiding the bounce was bullishness in the oil pits, renewed by output disruptions in Nigeria and a slightly bullish tone from Goldman Sachs concerning the ongoing supply/demand imbalance.

Global indices did not take part in today's rally. Asian indices closed higher but gains were not strong. Weak data from China increased hopes for QE but also raised the specter of continued slowing of the economy. European indices were much the same. The German DAX was closed for Whit Monday but other indices in the region were not, closing mixed in a low-volume session.

Market Statistics

Futures trading was mixed in the early part of the electronic session, first slightly up, the slightly down as economic data and surging oil prices vied for dominance. Going into the opening bell the indices were indicated to open flat, and did, but proceeded to march higher for just about the remainder of the day. Intraday high was hit just after 3PM, at which time gains were trimmed. Despite the late day pull back the indices were able to close near the high of the day, more than 1% higher than Friday's close.

Economic Calendar

The Economy

First on the economic calendar today was Empire Manufacturing, released at 8:30AM. The survey came in at -9.0, -19 points lower than last months reading of +9.6, and well below forecast of 7.5. Within the report New Orders fell into negative territory, -5.5, as did Shipments and Inventories, -7.3, while prices paid edged marginally higher. Prices received also fell. On the employment front the Employment Index remained unchanged but hours work fell to -9.3. The forward looking Future index remains in positive territory but fell as well.


The NAHB Housing Market Index was released at 10AM. The index shows home builder confidence held steady at 58 for the 4th month running. Within the report sales are unchanged at 63, future expectation rose 3 to 65 and traffic remains unchanged. On a region by region basis confidence fell by -5 in the Northeast, rose by 3 in the Midwest, rose by 2 in the South and was unchanged in the West.

Moody's Survey of Business Confidence mad a surprise drop this week, down -2.7 to 30.6 and the lowest level since March 21st. Mr. Zandi makes note of this week's drop but says it is too early to make much of it. This is true but no less concerning as sentiment has weakened considerably from last year and has yet to stage a significant comeback. According to the data confidence varies greatly worldwide and is the strongest in the US, weakest in South American due to ongoing political upheaval in Brazil and Venezuela. Sentiment in the EU deteriorated somewhat over the last week, possibly due to the upcoming British referendum on EU membership.


According to FactSet 91% of the S&P 500 has reported earnings so far this season. The blended rate for earnings growth is now -7.1%, unchanged from last week, better than the -8.7% predicted as the season began but still the worst quarter of growth since the earnings recession began. Of those who've reported 71% have beaten EPS projections, above average, while only 53% have beaten revenue projections, below average. Of the 10 sectors tracked, 7 have beaten expectations led by Consumer Discretionary.


Looking forward earnings projections for the rest year held steady from last week but projections for 2017 fell by a tenth. The 2nd quarter is still expected to show negative growth, about -4.6%, with growth returning in the 3rd quarter, about 1.4%. Growth is expected to improve going into the 4th quarter, about 7.5%, and into the following year. Full year 2016 growth projection now stands at 0.9%, flat from last week, with growth in 2017 expanding to 13.5%, down a tenth form last week.


The Dollar Index

The dollar tried to extend gains made on Friday but was not able to hold them. The Dollar Index gained less than a tenth intraday only to give it all up by the close, trading in a very tight range and creating a small doji candle. Last week the index broke above potential resistance on talk from the BOJ and may continue to move higher in the near term. The BOJ is warning it will add to QE in some form come the next meeting, July at the latest, if yen strength persists. However, given the fact that the yen has fallen on that news and may keep falling could preclude the need for such action. In the near term, upside target appears to be $95 or $95.50 provided the index can remain above $94.25 and the short term moving average. Risks this week include the FOMC minutes due out on Wednesday which could fuel rate hike speculation and dollar strength/weakness. As yet the BOJ talk is just that, talk, so the minutes could easily spark a movement, as could tomorrow's CPI data.


The Oil Index

Oil prices surged today on two things. First, a new report from oil bear Goldman Sachs sees supply/demand imbalance coming back into line quicker than they had expected. Second, supply disruptions in Nigeria, Canada and Libya helped to bolster this sentiment. However, there are some off-setting factors that should not be dismissed, namely that OPEC production rose again in the last month and that Canadian supply disruption is not as bad as feared. WTI gained more than 3.5% and set a new high dating back to November of last year and appears to be moving higher. The caveat is that supply and demand balance is still skewed to the supply side leaving oil prices vulnerable to whatever bearish news may hit the market. Additionally, with WTI trading above $47 it is likely that the shale producers will come back on line and further add to supply side imbalance.

The Oil Index gained only about 1.8% in today's action and did not set a new high. Today's action was the fifth day of consolidation around the short term moving average and closed near the middle of that range, if above the moving average and just above 61.8% retracement level. The indicators remain mixed, more bearish than not but showing signs of some support at this level, so there is no clear indication of direction at this time. If oil can maintain these levels earnings expectations for the sector should begin to rise and if so could carry the index back to retest it's recent high near 1,200. If not a retreat to 1,000 is also possible.


The Gold Index

Gold prices shot higher in early trading only to fall back to break even as the equities rally sapped demand. Spot price for gold jumped nearly 1.5% in the first half of the day, approaching resistance in the $1285 to $1290 region, and then fell back to erase all the gains by close of day. Fundamentals still support gold prices and potentially higher prices, given declining expectation for FOMC rate hiking, but danger exists in the form of the BOJ. BOJ talk to weaken the yen could prop the dollar up and send gold lower despite any action or inaction from the FOMC. Despite today's wild swing the candle formed is small and weak, near the middle of the three week range between $1250 and $1300. Volatility may increase in the coming weeks as we get a little more data, and wait on the next round of central bank meetings.

The gold miners got a pop from gold prices even though they, gold prices, were not able to hold the early gains. The Gold Miners ETF GDX gained 0.12% to trade near the top of it's three week consolidation range but the move was without conviction. Today's candle is a small doji and accompanied by mix indicators so it is likely the consolidation will continue. The indicators are mixed, MACD momentum is very weak, if to the downside, while stochastic continues to move lower, suggesting that a move back to retest support is likely. Support is near the short term moving average, near $23.25, with potential resistance just above today's close near $26.


In The News, Story Stocks and Earnings

Apple was a big name in the news today. The stock got a big pop from a Berkshire Hathaway filing which revealed a near $1 billion stake in the company. This news was tempered by another SEC filing, from hedge fund Tiger Management, which revealed it had sold off it's position in the company during the same period. Adding to the confusion, Leon Coopermans Omega Advisors also revealed they had purchased a stake in the company during the first quarter, but had already dissolved it. After the bell Greenlight Capital announced it had upped it's position in Apple. Regardless, the vote of confidence by Warren Buffet was enough to send the stock up by 3.7% to approach $95 and the recently broken line now turned potential resistance. The indicators are consistent with a rebound, bearish MACD and stochastic are rolling into a bullish crossover following the recent low, but also show confirmed weakness through extreme peaks (MACD) and a likely retest of that same low.


There were no earnings reports on the schedule today but this does not mean the season is over. There are on expected 21 S&P companies reporting this week, most of which are in the retail sector. The sector took a beating last week on a number of misses and reduced guidance, there is not much expectation for that to be any different this week. The Retail Sector SPDR XRT gained nearly a full percent today but was not able to reverse losses experienced on Friday, or to regain the support level broken with Friday's action. The indicators are showing sign of peaking at this level, but no indication of reversal is yet present. A move back above $41.50, support now turned resistance, would be bullish but will require better than expected earnings and more likely better than expected guidance. A failure to break above this level along with more weakness in the sector could take the XRT down to $40 or lower before support begins to kick in. Tomorrow Home Depot and TJ Maxx are on tap.


Home Depot may be able to surprise the market as it, as a retailer, is more exposed to housing trends than to factors driving the broader the retail sector. Today's action saw the stock rise by more than 1.75% intraday, confirming support along the short term moving average and approaching the all-time high set just last week. The indicators are mixed but more neutral than anything else, MACD is holding near the zero line, stochastic is trending near the middle of the range and both appear to imply a move is on the way, depending on how results are. Positive results could take the stock to another new high, a break above $125 very bullish, while negative results could drag the stock back to support levels between $125 and $130.


The Indices

It did not look like a bullish day in the early hours, pre-opening, and there really wasn't a major bullish catalyst to drive the market but the market rallied nevertheless. Today's action was led by the NASDAQ Composite which gained 1.22%, led by Apple. The tech heavy index recovered losses incurred Thursday and Friday of last week but was not able to regain the 4,800 resistance line or move above the short term moving average, both of which provided resistance, curbing today's gains. The indicators are rolling over into a bullish signal, stochastic is already firing what could be a strong signal, but MACD has yet to confirm. A break above the moving average and resistance would help confirm this move and if so could take it back to retest highs set last month. If not move to retest support near 4,675 is likely.


The next largest move in today's session was made by the Dow Jones Industrial Average with a gain of 1.00%. The blue chips created a long white candle, confirming the existence of support near 17,500, but the move was capped at the short term moving average. The indicators are mixed, showing some sign of support at this level and early signs of rolling over but no sign of strength. If the index is able to keep moving higher a break above the short term moving average would be bullish and could take it up to retest the 18,000 level. If not a retest of 17,500 with possible move down to the long term trend line near 17,250 is likely.


The next biggest winner in today's session was the S&P 500 with a gain of 0.98%. The broad market created a large but not overly strong white candle, was able to move back above the short term moving average but gains were capped just shy of the 2,075 resistance target. The indicators are mixed as with the other indices, stochastic is possibly rolling into a strong bullish signal, but this signal is not yet confirmed by MACD. Today's move appears to confirm support at 2,050 but again, the indicators are mixed so I am very cautious about it. If the index can continue to move higher and break resistance a test of recent highs near 2,100 is likely to find additional resistance. If the index moves lower first target for support is 2,050, a break below here could take it down to the 2,025 level or lower.


The Dow Jones Transportation Average brings up the rear in today's action and by doing so, assuming the transports are leading the market, lend weakness to today's analysis. The transports gained only 0.74% and created only a smallish, medium bodied white candle with upper shadow. This candle shows potential support at the 7,500 level but also resistance to a bounce from this support that when combined with the indicators is not promising. The indicators are weak and weakening with today's move, MACD is bearish and holding steady while stochastic moves below the lower signal line, suggesting that further testing of support is likely. Support is currently at the 7,500 level with possible upside target near 7,750. A break below support would be bearish and could take the index down to 7,250 or 7,000 in the near term.


The indices bounced today and the bounce could be good. Today's catalyst was a combination of Warren Buffet activity and oil prices, neither to be disregarded but also neither reason to be overly bullish. With earnings as poor as they are, expectations for earnings growth still poor, tepid and weak economic data, and the central banks still in focus (not to mention the fact we're on the verge of the summer season) I see little reason to expect much follow through. I am still very cautious, borderline bearish, for the near term and expecting further weakness in the market. I could be wrong, but I think it better to be cautious now and get into a rally late rather than wishing for one and losing. Longer term I see the bull market continuing, earnings and the economy will return to growth soon, it's just a matter of when.

Until then, remember the trend!

Thomas Hughes


New Plays

Debt Drain

by Jim Brown

Click here to email Jim Brown
Editor's Note

Leveraged buyouts can sometimes work great but too many times they leave the company with too much debt. First Data is one of those deals where buyouts and acquisitions have left the company with a serious debt load that is drowning the stock.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

FDC - First Data - Company Profile

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Sell short FDC shares, currently $10.67, initial stop loss $11.85

Optional

Buy Long July $10 put, currently $.65, no initial stop loss.




In Play Updates and Reviews

Support Bounce

by Jim Brown

Click here to email Jim Brown

Editors Note:

The extreme negativity at the close on Friday was erased with a 225 point intraday short squeeze. This was the third consecutive week that we have seen a triple digit short squeeze early in the week. The last two failed miserably and we saw lower lows by the end of the week.

The squeeze was powered in part by a 4% gain in Apple and a 3% gain in the biotech sector. The top 8 gainers in the Dow were responsible for 110 Dow points and the rest of the components went along for the ride. DIS, NKE, TRV, AXP were the only losers.

I suspect this short squeeze will end up like the last two with a sell off over the next couple days. We are in the May sell cycle and the outlook is fading. Bank of America lowered their price target on the S&P at year end to 2,000 and said we were at risk for a major drop during the summer.

Hedge Fund Farallon also believes there is a big drop ahead. They sold 3.3 million SPY calls and raised their put position from 11.6 million to 12.9 million contracts. That is some serious belief in your convictions.

Despite the big market move, none of our positions moves more than 31 cents. The small cap sector was very quiet despite a 13-point gain on the Russell 2000.

The Dow closed 50 points off its high and failed right at resistance at 17,750. The S&P failed at Thursday's resistance high at 2,071 and closed at 2,066 with a 20 point gain. Support at 2,040 seems a long way off but our high close last week was 2,084 and we still retreated to the low 2,040s by Friday.

This is option expiration week and volatility is to be expected.




Current Portfolio





Current Position Changes


GPRO - GoPro

The short position remains unopened until a trade at $8.75


AMAG - AMAG Pharma

The short position was opened at $18.33.


DB - Deutsche Bank

The short position was opened at $16.37.


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


BLMN - Bloomin Brands -
Company Profile

Comments:

No specific news. Minor gain when it should have been more. Big dip at the open was recovered and volume was higher than normal. Maybe we are getting ready for a move.

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.

Position 5/10/16:

Long BLMN shares @ $19.71, initial stop loss $18.25.

No option recommendation due to wide spreads.



WIN - Windstream Holdings - Company Profile

Comments:

No specific news. Shares dipped back to support after the shareholders meeting was held on Friday. There was nothing material in the minutes and votes taken in the meeting.

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.

Position 3/11/16

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


AMAG - AMAG Pharmaceuticals - Company Profile

Comments:

No specific news. Shares were up only slightly with the 3% spike in the biotech sector.

Original Trade Description: May 14th.

AMAG Pharmaceuticals, Inc., a specialty pharmaceutical company, provides products and services with a focus on maternal health, anemia management, and cancer supportive care in the United States. They also own Cord Blood Registry. This company collects, processes and stores umbilical cord blood and cord tissue for use in fighting chronic diseases in later childhood.

In their recent earnings they reported 94 cents that beat estimates for 89 cents. However, revenue of $109.3 million missed estimates for $123 million. Service revenues at Cord Blood were $19.5 million. However, R&D expenses rose +103.6% to $14.2 million and SG&A expenses rose 96.7% to $63.2 million.

With revenue well under estimates and expenses rising dramatically, the outlook for earnings weakened. While the company reiterated guidance for full year revenue in the $520-$570 million range that would require a significant rise in drug sales from the $109 million in Q1. Shares were downgraded to hold by Raymond James.

Earnings August 2nd.

Shares are at a 52-week low and they did not rally on Friday when the entire biotech sector was up more than 1%. They also failed to rally on the 9th when the biotech sector was up +3%. Apparently investors are not convinced they are going to be able to meet their revenue targets and earnings are going to suffer.

Position 5/16/16:

Short AMAG shares @ $18.33, initial stop loss $20.25.

Optional

Long August $17 put @ $1.08, initial stop loss $20.25.



DB - Deutsche Bank - Company Profile

Comments:

DB was cut to sell by Berenberg. The analyst, James Chappel, said the bank faces "insurmountable headwinds" and put a $10 price target on the stock. He said the bank cannot survive without raising capital and with sentiment so depressed, it would be nearly impossible to do with a secondary offering. With their credit outlook so depressed it will be nearly impossible to raise money in the debt market at anything resembling a reasonable cost. You can't fix a debt problem with more debt.

Original Trade Description: May 14th.

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Position 5/16/16:

Short DB shares @ $16.37, initial stop loss, $17.75.

Optional

Long July $16 put @ $1.10, initial stop loss $17.75.



ENDP - Endo Intl Plc - Company Description

Comments:

No specific news. Biotech sector was up more than 3% in today's short squeeze.

There was an article put out by TheStreet.com questioning whether Endo would be a penny stock by year-end.

Original Trade Description: May 11th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.

Optional

Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.



GPRO - GoPro - Company Profile

Comments:

GoPro only gained a nickel and the stock is extremely oversold. There was no short covering in these shares. One analyst today was projecting a $6 price target.

SHORT GPRO SHARES with a trade at $8.75, a new low. Stop loss $9.45

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.

Short GPRO with a trade at $8.75

Previously Closed 5/13/16: Short GPRO shares @ $9.65. Exit $9.35, +.30 gain.



SQ - Square - Company Profile

Comments:

No short covering here until the close. Shares were down -50 cents intraday and rebounded 30 cents at the close.

Tuesday is lockup expiration and we will be closing the put side of this position in the next several days depending on stock movement. I put a stop loss on the put just in case it bounces on Tuesday.

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.

Position 5/9/16:

Long May $10 put @ 60 cents. See portfolio graphic for stop loss.
Long Jun $11 call @ 55 cents. See portfolio graphic for stop loss.



XLF - Financial ETF - ETF Profile

Comments:

No material movement. 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.

Position 4/12/16

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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