The Dow dropped to 17,600 at the open before rebounding to resistance at 17,700 and then fading into the close. Considering this was a quadruple option expiration the market action was rather tame. Next week could be significantly different as traders enter/exit positions going into Wednesday's close based on the survey results from the UK ahead of Thursday's exit vote.
That means the volatility on Wednesday could be high and Thursday/Friday could be worse. Regardless of the outcome of the Brexit vote the market is likely to be highly directional based on the vote results. We could have a monster rally or a monster crash.
Current Position Changes
SQ - Square
The June call expired worthless.
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
CSII - Cardiovascular Systems - Company Profile
Big drop on no news. Many of the healthcare and biotech stocks sold off hard on Friday.
Original Trade Description: June 13th.
Cardiovascular Systems, a medical technology company, develops, manufactures, and markets devices to treat vascular diseases in the United States. It offers peripheral arterial disease products, including Stealth 360Â° Peripheral Orbital Atherectomy System (OAS), Diamondback 360 Peripheral OAS, Diamondback 360 60cm Peripheral OAS access device, and the 4 Diamondback 360 French 1.25 Peripheral OAS access device products for treating a range of plaque types, such as calcified plaque, in leg arteries both above and below the knee and address many of the limitations associated with existing surgical, catheter, and pharmacological treatment alternatives, as well as Diamondback 360 Coronary OAS, a catheter-based platform to facilitate stent delivery in patients with coronary artery disease.
In the last quarter revenues rose 7%, gross margin rose from 77.8% to 80.4% and operating expenses decline -5%. They expect to reduce expenses by another 7% in the current quarter. Coronary revenues rose +31%.
With more than 18 million Americans suffering from Peripheral Artery Disease (PAD), which is the accumulation of plaque in the peripheral arteries, their market is booming. Coronary Artery Disease is a leading cause of death in the USA. With more than 40% of the population already diagnosed and probably another 20% undiagnosed the market for their products is also growing rapidly. With the baby boomers retiring and these health problems becoming more life threatening as they age the number of "interventions" as my cardiologist calls them is growing rapidly. Stenting any patient with any symptoms of heart disease is becoming more common than tonsillectomies for children. More than 600,000 Americans die from heart disease annually. That is equivalent to 6 jumbo jet crashes every day.
In Q1, Broadfin Capital added a 1.46 million share stake in CSII or 4.47%. Point72 Asset Management added 102,000 shares. Shares have broken out of resistance at $16 and continue to creep higher.
Earnings are August 3rd.
There was only a minor decline today in a very weak market.
Long CSII shares @ $18.16, see portfolio graphic for stop loss.
No option recommended because of wide spreads.
HPE - Hewlett Packard Enterprise - Company Profile
No specific news. Nice rebound.
Original Trade Description: June 2nd.
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 Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.
For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.
The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.
This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.
They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.
Earnings Aug 23rd.
HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.
Long HPE shares @ $18.40, see portfolio graphic for stop loss.
Long August $20 call @ 40 cents. No stop loss.
NVAX - Novavax - Company Profile
No specific news. Shares declined slightly in a weak market but are still holding at a five-month high.
Original Trade Description: June 14th.
Novavax, Inc., a clinical-stage vaccine company, focuses on discovering, developing, and commercializing recombinant nanoparticle vaccines and adjuvants. The company produces its vaccines using its proprietary recombinant nanoparticle vaccine technology. Its product pipeline includes respiratory syncytial virus (RSV) vaccine candidates for elderly and maternal immunization that are in Phase III clinical trials, as well as pediatric RSV candidate, which is in Phase I clinical trial; seasonal quadrivalent influenza and pandemic H7N9 vaccines, which are in Phase II clinical trials; vaccine candidate against Ebola Virus that is Phase I clinical trial, as well as combination respiratory vaccine candidate and seasonal influenza vaccine candidate that is in pre-clinical trial; and rabies G protein vaccine candidate, which is in Phase I/II clinical trial. The company also has pre-clinical stage programs for various infectious diseases, including the Middle East respiratory syndrome coronavirus; and develops technology for the production of immune stimulating saponin-based adjuvants.
Novavax is using a new proprietary model for vaccines that does not require the long incubation time and the annual reformulation. They are far along in their trials compared to other companies and these vaccines can be given to children.
The top line State III data for the RSV F vaccine is due out in Q3 and they already have a fast track designation from the FDA. The drug could be commercially available by mid-2017. This drug could generate $1 billion in sales. While there is always the potential for a trial to fail, this initial drug has already progressed through all the early and mid stage trials. Novovax also has $434 million in cash so plenty of liquidity to continue the process.
Earnings August 9th.
Analysts are predicting a 100% gain for NVAX over the next year and that is attracting new investors today. With their advanced pipeline they could be an acquisition target. Shares only pulled back about 50 cents in the market weakness over the last three days and they posted a gain in today's weak market.
Long NVAX shares @ $6.65, see portfolio graphic for stop loss.
No options recommended because of price.
UIS - Unisys Corp - Company Profile
No specific news. Minor gain in a weak market.
Original Trade Description: June 6th.
Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.
Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.
Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.
Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.
Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.
Earnings July 28th.
Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.
If the current rebound continues the next material resistance is $12.
Long UIS shares @ $8.47, no initial stop loss.
Long October $9 call @ 80 cents. No stop loss.
BEARISH Play Updates
GOGO - Gogo Inc - Company Profile
No specific news. Gained a penny.
Original Trade Description: June 11th.
Gogo provided communication services to the commercial and business aviation markets in the U.S. and internationally. They provide in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers to and from North America.
Gogo has had a rough few months as airlines complained about the service and some removed the Gogo service and replaced it with a competitor.
On May 23rd Gogo announced the pricing of $525 million in senior secured notes. On May 26th the stock spiked 20% after the company filed a notice with the SEC saying an unspecified airline had requested a proposal for service to cover its large domestic fleet. Under the proposal Gogo would provide Wi-Fi to a "meaningful" portion of the domestic fleet that is is currently serving. Gogo cancels the $525 million debt sale.
On June 3rd shares plunge as the unspecified airline turns out to be American Airlines and the proposal is far less than expected. American picked ViaSat (VSAT) to provide internet access on 100 new Boeing jets. Gogo updates its SEC filing to say it would provide service on 140 American planes and continue service on 400 others. However, American retained the option to remove Gogo equipment on any American planes at any time. Gogo said it now expects American to remove its equipment on the "mainline" planes over the next several years. American said it was planning on upgrading the service on its planes but had not picked a successor. That means the 100 ViaSat planes will be a live test and will likely replace Gogo. ViaSat provides 12 mbps of bandwidth to each seat while Gogo provides 70 mbps for the entire plane and that bandwidth has to be shared by all passengers. There is a significant difference.
On June 9th Gogo reinstates the $525 million debt offering and priced it at 12.5% after Moody's rated it a B3-PD (Probability of Default) credit.
Earnings Aug 4th.
The future is not bright for Gogo. They are trying to produce a faster service through satellite connections rather than ground based systems but the testing and roll out is not going smoothly. Several years of hostility between passengers and carrier over the slow bandwidth has poisoned the relationships and ViaSat appears poised to take over the market.
Shares closed at a historic low on Friday at $8.97 and the downward trend is likely to continue.
Short GOGO shares @ $8.99, see portfolio graphic for stop loss.
I am not recommending an option but the August $8 put is $75 cents.
JBLU - JetBlue - Company Profile
No specific news. New 17-month low.
Original Trade Description: June 15th.
JetBlue Airways Corporation, a passenger carrier company, provides air transportation services. As of December 31, 2014, the company operated a fleet of 25 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 Embraer E190 aircrafts. It also served 93 destinations in 28 states in the United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 19 countries in the Caribbean and Latin America.
Business was good until all the airlines began adding capacity at the same time. The discount airlines were particularly aggressive. In order to fill that extra capacity they increased the number of discount seats and overall pricing went down. Now they have plenty of passengers but their revenue per mile has declined. They are still making money but with rising fuel prices they are going to have to raise ticket prices and that will dampen demand.
Last week JetBlue said May traffic measured in revenue passenger miles of (RPMs) rose +10.7% from 3.47 billion to 3.84 billion. Over the prior 12 months available seat miles (ASMs) rose 12.1% to 4.54 billion. The load factor or the percentage of seats filled by passengers declined from 85.7% to 84.6% because the rapid expansion of capacity outweighed the traffic growth generated by the discount tickets. That means the revenue per available seat mile (RASM) declined -7%.
The airline lowered guidance for RASM to decline 7.5% to 8.5% for Q2 compared to prior guidance for a 7% decline. They also lowered ASM growth from 8.5%-10.5% to 8.0% to 9.5%. They do not need to add additional capacity if they cannot fill the seats they already have.
Factor in the strong dollar, rising fuel prices and the increased terrorist activity and the outlook for profits is declining. Since the Belgium airport attack airline traffic has slowed. People do not want to be blown up while waiting in a security line. Add in the Zika virus that has disrupted traffic to Latin America and the Caribbean and that is another reason seats are empty. On the positive side JetBlue was accepted by the DOT to operate scheduled flights to Cuba. However, compared to their total capacity those few weekly flights will not move the needle.
Earnings July 26th.
JBLU shares have already declined significantly. They fell sharply in early May when they reported April traffic numbers. When the numbers did not improve in May they declined again starting on June 10th. JBLU was a rocket ship when it rallied from $5 to $24 in 2015 but we are headed for a round trip with shares back at $16.66 today. It has been a series of disappointing events one after another. I think we will see single digits again soon because of all the events impacting traffic and earnings I discussed above.
Position 6/16/16 with a JBLU trade at $16.50
Short JBLU shares @ $16.49, initial stop loss $17.65
Long September $16 put @ $1.15, no initial stop loss.
Left Over Lottery Tickets
These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.
These positions are only updated on the weekend.
FDC - First Data - Company Profile
No specific news. Still weak and well off the June highs. We still have a lot of time.
We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remains open. At the current 5-cent price that is a lottery ticket that the headlines will fade and the original direction will return. This is a July option so plenty of time for a disaster to appear.
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.
Long July $10 put @ $.60, no stop loss.
Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.
SQ - Square - Company Profile
No specific news. The Apple Pay announcement sesemed to help Square while it was negative for PayPal. The June call expired giving us a net loss of 15 cents on the entire position.
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.
Closed 6/17/16: Long Jun $11 call @ 55 cents, expired, -.55 loss.
Net loss on the position was 15 cents.
Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.
TRN - Trinity Industries - Company Profile
Trinity rebounded on Friday after they announced a settlement with the Federal Highway Safety Association regarding the acceptability of their products for Federal reimbursement.
We have a July call option that is worth 20 cents today. I would bet $20 that it will recover by late July.
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
WIN closed at a seven-week high on Thursday but gave back some of the gains in Friday's weak market. They announced they retired $335 million in debt so far in Q2.
We have an August $9 call and it could end up in the money because that is well into the future. With the option worth only 21 cents today, there is no value in closing it. This is a lottery play that WIN will be above $9 by August.
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.
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