Option Investor
Newsletter

Daily Newsletter, Thursday, 5/19/2016

Table of Contents

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

Market Wrap

The Fed Who Cried Wolf

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The surprising sentiment in the FOMC minutes sent the dollar soaring, and just about everything else lower, but the market still isn't convinced a rate hike will happen in June. Based on the labor data, the leading indicators and CPI it certainly looks like the meeting will be a live one, even if the target rate isn't increased. FOMC voting member Dudley concurs with this sentiment, saying in statements today that June is definitely a live meeting. According to the CME's Fed Watch Tool the chance of a June hike is now 30%, up from 8% earlier this week.

International markets were affected by yesterday's new as well. Asian markets closed flat, perhaps waiting to see what happened during today's US session. European traders were not so cautious. Indices in that region fell more than -1% weighed down by interest rate fear and plunging commodity prices.

Market Statistics

Futures indicated a lower open all morning despite positive earnings results from Wal-Mart and Cisco. Early indications pointed to an opening decline of -0.25% and this held fairly steady going into the opening bell. At the bell stocks did indeed retreat, shedding that quarter point in the first minute, and then proceeded to move lower throughout the morning hours. An early low was hit at 10AM, and then another just before 11:15AM. Over the course of the next hour an intraday bottom was put in, resulting in a rebound from the low. The remainder of the day saw the indices move slowly higher, in fits and starts, but not enough to recover the days losses.

Economic Calendar

The Economy

Lots of data today, starting with jobless claims. Initial claims fell -16,000, reversing last week's gain, to hit 278,000 and has now been below 300K for 63 weeks. Last week's figure was not revised. The four week moving average of claims rose 7,500 to hit the highest level since early January. On a not adjusted basis claims fell -6.5% versus an expected -1.2% and remain above last years level by 0.5%. Despite the fact that not adjusted claims have been tracking above last years level for the past few weeks they and adjusted claims remain low relative to the long term trend and consistent with labor market health. On a state by state basis New York and Pennsylvania led with gains in new claims of +14,494 and +3,547 while Kansas and Ohio led with declines in new claims of -3216 and -2525.


Continuing claims also fell this week, shedding -13,000 to hit 2.152. Last week's figure was revised up by 4,000. The four week moving average of continuing claims rose by 4,250 reflecting last week's gains in claims. Even so, the 4 week average remains near the long term low and both it and the headline number are consistent with ongoing labor market health.

The total number of Americans continues to decline in line with seasonal and secular trends. This week the total number of claims fell -13,598 to hit 2.122 million. This is the lowest level of claims since mid-November of last year. Although the pace of decline slowed somewhat over the last week of data we can still expect to see this number decline over the next 3 to 4 weeks with an expected low near the 2 million mark. On a year over year basis total claims are down -3.5% from this same time last year and remain consistent with declining unemployment and labor market recovery.


The final read on the Philadelphia Federal Reserve Manufacturing Business Outlook Survey came in at -1.8. This is down from the advance read of -1.6, the 8th month of contraction and well below expectations for 2.7. Within the report the index for new orders fell from 0 to -1.9, the 2nd month of decline, shipments rose by 10 but remain negative, unfilled orders remains negative and inventories remain negative. The employment index did make a substantial gain from last month, up 15 points, but also remains negative, the 5th month of contraction within the sector. The only bright spot in the report is the 6 month forward outlook which is still positive although it too declined this month.


The Index of Leading Indicators was released at 10AM. It shows a 0.6% increase in the index for April, the largest increase in a year on a revised and adjusted basis. On a not revised basis it is equal to the headline initial release for October. The coincident index also rose, gaining 0.3% as did the lagging index, also 0.3%. According to commentary from the Conference Board economists the index shows moderate growth trends should continue into the end of the year. Areas of strength include the labor market, financial indicators and building permits.


Tomorrow the only release on tap is existing home sales. Sales are expected to run in the range of 5.40 million on an annualized basis, up slightly from last month. Next week is light on data but not void, look out for new home sales, the housing price index, pending home sales, durable orders, Michigan Sentiment and the 2nd read on 1st quarter GDP.

The Dollar Index

The Dollar Index got a big boost from yesterday's hawkish sounding FOMC minutes, and today's comments from Dudley. It appears that now the FOMC and the BOJ are back on diverging policy paths, the FOMC tightening and the BOJ loosening, but as yet this divergence is grounded in talk and not action. The BOJ may not have to act as they hinted due to the recent rebound in the dollar, and if they don't could easily wind up strengthening the yen, while likewise the likelihood of a June rate hike remains low in the eyes of the market. If the FOMC doesn't hike in June, or indicate the next hike is very very close, they could also weaken the dollar.

Today's action in the index shows some indecision, it moved up to touch next resistance at the $95.50 level and retreat from it. The candle is bullish, as are the indicators, so further testing of resistance at this level is likely. However, with the upper shadow appearing near resistance like it did a break above this level is questionable. We've got about 4 weeks until the next round of central bank meetings and lots of data between now and then so consolidation between support, $94.25, and resistance, $95.50, may be on the way.


The Oil Index

The oil price was volatile today as stronger dollar, an increase to US stockpiles and output disruptions in Nigeria vied for dominance. WTI had been down as much as -2.5% in early trading, driven by stronger dollar, only to recoup the loss by the end of the session. Today's supporting news, Nigeria's main oil terminal was shut down with all workers evacuated due to "criminal activity". Exxon, which operates the terminal, clarified an earlier report stating that production continued although business was disrupted. Today's action leaves oil prices near the 6 month high primarily supported by near term supply fears and long term rebalancing speculation.

The Oil Index lost about a half percent in today's action and persists in testing support even while the price of oil is testing resistance. Today's action gapped below the short term moving average, and broke the 1,100 level on an intraday basis, only to find support and move higher during the session. The lower wick on the candle shows support at this level although the strength of that support is questionable. The indicators are mixed; momentum is bearish but in decline while stochastic is bouncing from the lower signal line, a combination indicative of potential support but by no means a guarantee of it. A break below this level could take the index down to the 1,000 level while a bounce from it would likely find resistance at the 1,120 level and the 61.8% retracement.


The Gold Index

Gold prices took a tumble driven by a stronger dollar. The spot price fell more than -2.5% intraday to hit a 3 week low but managed to pare the losses before the close of the session. The FOMC minutes put a rate hike firmly on the table regardless of what actually happens and that has gold moving down to test support. Even with today's move the metal remains above the $1250 level and may remain there in the near term. Over the next 4 weeks data will be the primary driver; strong data will point to the June rate hike, a stronger dollar and lower gold prices, weak data the opposite. The real catalyst, the strong catalyst, will be the FOMC meeting/BOJ meeting.

The gold miners were affected by falling gold prices but the move lower was met by support. The Gold Miners ETF GDX gapped lower at the open by more than -2%, opening below the short term moving average and below potential support at the bottom of the 3 week consolidation range, but buyers stepped in to scoop up the bargains. By end of the day the ETF had recovered all the losses and more, moving back above the moving average and closing with a gain near 1.5%. The indicators remain mixed which, along with today's price action, point to further consolidation at current levels. For now, support is near $23.50 and appears strong. If gold prices are pushed lower this support could fail, is so a move below $22.50 and possibly as low as $21 looks likely.


In The News, Story Stocks and Earnings

Wal-Mart was one of few winners in today's session. The world's largest discount retailer reported a beat on the top and bottom lines despite the fact that others in the retail space, including Target, have not had much success. The results were driven by better than expected US sales and increased global comps (on a constant currency basis). Within the report the company revealed that it's move to raise wages had a positive affect on earnings and helped to drive the stock higher even though full year guidance is only in-line with expectations. Shares of the stock moved sharply higher in the pre-opening session, gapping up by more than 5% at the open, and then moved higher during the day.


Wal-Mart helped to lift the entire the retail sector. The XRT Retail SPDR gained a little more than 1% in today's action, moving up from the three month low set yesterday. The move appears to be a near term bottom as indicated by both MACD and stochastic. Bearish MACD has begun to retreat and stochastic is rolling over while deep in the lower signal zone, both indicative of potential support. The caveat is that the sector is highly divided, while one store does well another does not, so a sustained rally does not look likely at this time. For example, Ross Stores reported after the bell, EPS in-line, revenue weak with weak full year guidance. Gap also reported after the bell, meeting expectations but announcing the closure of more than 70 stores worldwide. First target for resistance for the XRT is about 2.25% above today's close, near the $41.50 support/resistance line broken at the end of last week.


Cato Corporation also reported before the bell. The retailer of women's specialty apparel and accessories reported that revenue and earnings grew from last year in the comparable quarter, and were above expectations. The results were driven by expanding margins, up 30 basis points, comp store sales were flat. Along with the report the company raised full year guidance to a range above the previous. The stock responded well to the news and closed with a gain near 6%. Even with the gain shares of Cato remain near the middle of a long term trading range, but indicated to move higher. Next target for resistance is near $38.


The Indices

The indices moved lower today on increased fear of impending FOMC rate hike. They also found support and were able to recover some of the losses as skeptics have reason to believe the Fed is just blowing more wind. Today's action was led by the Dow Jones Transportation Index with a loss of -0.58%. The transports created a small hammer-like doji, just above the 7,500 support line, and below the short term moving average. The indicators are mixed, momentum is bearish but in decline while stochastic rolls into bullish signal, consistent with potential support at this level. Near term the index may remain within 7,500-7,750 range, between support and the short term moving average, while longer term direction is unclear. A break below support could take it down to 7,250 or 7,000, a break above resistance could go as high 8,000 or 8,100 before meeting next resistance.


The tech heavy NASDAQ composite made the next largest decline in today's session, about -0.56%. The index created a small doji candle, setting a new 2 month intraday low, but not quite reaching my support target of 4,650. The index appears to be trying to put in a near term bottom but this is by no means confirmed. The indicators are consistent with a potential bottom but mixed, leaving it open to further decline. As of today's close the index is smack in the middle of a tight range between support at 4,650 and resistance near 4,780. A move beyond either of these target would be significant and could lead to further moves in the direction of the break. A break below support could go as low as 4,550 in the near term, a break above resistance could go as high as 4,900.


The third largest decline was posted by the Dow Jones Industrial Average which lost -0.52%. The blue chips created a small bodied black candle with long lower shadow that found support just above the long term up trend line. The lower shadow is comparable to a hammer, but today's candle is not overly strong. The indicators are weak; bearish MACD momentum held steady while stochastic flattens out just above the lower signal line with %K moving lower, leaving the index open to further decline. First target for support is the long term trend line, near 17,250, a break below that could take the index down to 17,000 or lower. Today's action also broke the neck line of a potential H&S reversal, that if confirmed would carry a target near 16,900.


The S&P 500 brings up the rear today, falling only -0.37% at the close. The broad market also broke through a potential neckline with today's action, a move that if confirmed could take it down to 1,980 or lower. The indicators are weakest with this index, bearish MACD ticked higher and stochastic has begun to move lower, consistent with potential reversal. If the index manages to regroup and move higher resistance is just above today's closing price near 2,050, and then again just above that at the short term moving average near 2,060.


Today's market action was mixed at best, and bearish at worst. The indices set new near term lows, have weak/mixed indicators and although found intraday support have little reason to rally. The FOMC may or may not raise rates in June but even so, a rate hike is coming soon and that, along with poor outlook for 2nd quarter earnings and declining full year outlook leave them susceptible to deeper correction. I remain bullish into the end of the year because we are expected to see earnings growth return, but find no reason to be so now without some catalyst to bring the bulls back out in force. I am bearish in the near term, waiting and watching for the next great bullish entry.

Until then, remember the trend!

Thomas Hughes


New Plays

This Horton is not an Elephant

by Jim Brown

Click here to email Jim Brown
Editor's Note

Today, Hortonworks is a software company specializing in the Hadoop platform. Horton gave up on the egg and became a tech wizard.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

HDP - Hortonworks - Company Profile

Hortonworks, Inc. focuses on the development, distribution, and support of Hadoop open source project in the United States and internationally. It offers Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.

In March Hortonworks and Hewlett Packard Labs announced a collaboration to enhance Apache Spark. Hewlett & Hortonworks

Apparently, they are not setting the world on fire. They reported a Q1 loss of 68 cents that missed estimates by a penny. Revenue rose to $41.3 million and beat estimates slightly. They guided for the current quarter for revenue of $45 million that was in line with estimates.

Investors were not excited about the lackluster earnings and the prospect for continued losses. Shares fell from $12 to $10 after the earnings and after a small dead cat bounce back to $11 the trend has been lower. The stock closed at $9.89 today and a three-month low. The historic low is $7.12 and the odds are good it will be tested if the overall market remains weak.

Short HDP shares, currently $9.89, initial stop loss $10.75.
No options recommended because of wide strikes.




In Play Updates and Reviews

Support Held Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped to 2,025 intraday while trading in a 19-point range. It rebounded at the close to end fractionally over support at 2,040.04. The S&P refuses to relinquish its hold on 2,040 but today was still a lower low. Eventually it will decline too far to snap back at the close and remain above that level.

The Dow finally broke below critical support at 17,500 to close at 17,435 after trading as low as 17,331. Support for the Dow has failed although there is light support at 17,400. The Dow's decline should be the final nail in the bull's coffin but investors bought the dip to lift the Dow +100 points off its lows.

The biotech sector was not supportive today with a -1.4% drop compared to -0.5% on the major indexes.

The FOMC minutes continue to be blamed as fear over a rate hike in June sent the dollar soaring to two-month highs and commodities declining.

We did not get much movement on our shorts despite the negative market. SQ did gain 20 cents so it appears holders are not going to sell their stock immediately.




Current Portfolio





Current Position Changes


GPRO - GoPro

The short position was opened with a trade at $8.75


LOCO - El Pollo Loco

The short position was opened at $10.61.


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. Small positive gain in a weak market. Maybe there is hope for a rebound.

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.



SQ - Square - Company Profile

Comments:

Shares were up two days in a row after lockup expiration. Time for the shorts to start covering.

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 Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.




BEARISH Play Updates


AMAG - AMAG Pharmaceuticals - Company Profile

Comments:

No specific news. New intraday low under $18. The biotech sector was not supportive today. Analyst meeting announced for June 1st.

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, see portfolio graphic for stop loss.

Optional

Long August $17 put @ $1.08, see portfolio graphic for stop loss.



DB - Deutsche Bank - Company Profile

Comments:

No specific news. DB disclosed new corruption uncovered by their auditor. Employees put on trades using the banks money that will generate $37 million in personal profits. No change in outlook. This dead cat bounce should fade.

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, see portfolio graphic for stop loss.

Optional

Long July $16 put @ $1.10, see portfolio graphic for stop loss.



ENDP - Endo Intl Plc - Company Description

Comments:

No specific news.

Resistance is 15.85 to 16.15 and I recommend we stay with it until we see if that resistance will hold. The current stop loss of $16.45.

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.



FDC - First Data - Company Profile

Comments:

No specific news. Shares rose all day. Maybe support at $10.50 is going to hold.

Original Trade Description: May 16th.

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.

Position 5/17/16:

Short FDC shares @ $10.69, see portfolio graphic for stop loss.

Optional

Long July $10 put @ $.60, no initial stop loss.



GPRO - GoPro - Company Profile

Comments:

GoPro opened at our entry trigger at $8.75. That was a new low but shares failed to decline much further. 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.

Here is an interesting article on GoPro competitors. We could see this stock reach low single digits. GoPro Competition

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 5/19/16

Short GPRO shares at $8.75, see portfolio graphic for stop loss.

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



LOCO - El Pollo Loco - Company Profile

Comments:

No specific news. Shares opened lower but rebounded slightly with the market at the close.

Original Trade Description: May 18th.

El Pollo Loco develops, franchises, licenses and operates quick service restaurants in the USA. The company offers individual and family sized chicken meals, Mexican inspired entrees and sides. They currently have 430 company owned and franchised restaurants. They are planning opening 16-20 additional stores in 2016.

The big spike on the IPO came on name recognition, a successful roadshow and a small number of shares initially offered. They later waived the lockup period and allowed insiders to sell their shares on November 19th, 2014, two months earlier than stated in the IPO documents. Shares crashed from $33 on the news and have never recovered that level.

The reported earnings on May 5th of 17 cents that missed estimates for 18 cents. Revenue of $94.4 million also missed estimates for $96.9 million. They guided for full year earnings of 70-74 cents, which was almost zero growth from the Q1 numbers. That suggests the competition is fierce and they are having trouble gaining market share. Earnings in 2015 were 71 cents.

Net income declined -19.8% in Q1. Same store sales declined -0.6% for company operated restaurants. That is not a good track record to use when selling new franchises.

Next earnings August 4th.

I think the crazy chicken is dying. Their moment in the sun is fading along with their stock price. Shares are rapidly approaching their post IPO low of $9.58 and once you break under that $10 level it is very hard to recover.

Position 5/19/16

Short LOCO shares @ $10.61, see portfolio graphic for stop loss.
No options recommended.





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