Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/16/2016

Table of Contents

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

Market Wrap

Turnaround Tuesday

by Jim Brown

Click here to email Jim Brown

Monday's breakout to another triple index high was completely erased by declines on Tuesday.

Market Statistics

Overnight declines in Asia led to declines in Europe and a decline in the S&P futures ahead of the U.S. open. Weak Chinese economic reports led to expectations for future stimulus on Monday but the rally lost traction overnight. Economic weakness in Europe was also to blame.

The lackluster earnings guidance from Home Depot also caused a decline in the stock and weighed on the Dow.


The economic reports were positive but they could not rescue the markets from the opening drop. New residential construction for July rose from 1.189 million to 1.211 million on an annualized rate. Consensus had been for a decline to 1.180 million. The gain came mostly from new multifamily structures with a rise from 420,000 to 441,000. Single-family starts rose from 766,000 to 770,000.

Housing permits, which predict starts in the coming months, saw single family permits decline from 738,000 to 711,000. Multifamily permits were up sharply from 415,000 to 441,000. Housing starts would have been higher but the West saw a -5.9% decline due to the impact of forest fires and drought. Starts in the Northeast spiked 15.5%, South +3.5% and Midwest +2.3%.

Although this was a good report, the permit backlog is decreasing with a -5% decline in July and is now down -8.9% from July 2015. This suggests the housing boom may be losing traction but it also reflects the coming winter months when construction slows.


The Consumer Price Index (CPI) was flat at zero for July and matched analyst consensus estimates. This was after a +0.2% rise in each of the prior two months and a +0.4% rise in April. Energy costs were blamed with a -1.6% decline. Food prices were unchanged. The core CPI that excludes food and energy rose +0.1% and slightly less than expected.

Airline fares were volatile and declined overall. Used car prices fell -1%. Energy prices are down -10.7% over the last 12 months while food prices have risen +0.2%. The core CPI is up +2.2% on a trailing 12-month basis.

The weak CPI reduced the chances of a September rate hike despite some comments from Fed presidents. San Francisco Fed President John Williams actually mentioned the possibility the Fed should raise its inflation target from 2% to something higher since the headline CPI rate is already over 2% and the Fed is no closer to hiking. That was met with much criticism.


Industrial production for July rose +0.7% after a +0.6% rise in June. This was very unexpected with the consensus estimate only +0.3%. This was unexpected because of the production declines three of the four months from February through May. As always, there is a statistical anomaly impacting the headline number. Production in the utility sector rose +2.1% in each of the last two months. Utility production should not be counted in the headline calculation but the government saw fit to do that many years ago. If utilities have to produce more electricity for cooling in the summer it inflates the industrial production number and makes it appear the country is doing better economically. Politicians in power can brag that production is rising but they conveniently ignore the number in the spring and fall when utility production is slow.


Internet E-Commerce Sales rose from $92.8 billion to $97.3 billion for Q2 for a 4.5% gain. Retail sales in brick and mortar stores rose only +1.5% in the same period. Online sales have risen 15.8% from Q2-2015. Online sales have posted gains in 30 consecutive quarters while normal retail sales have declined sporadically. In 2005, Internet sales were 2.4% of total sales. In Q2, that number had risen to 8.1% of the total. As big as Amazon is today, they are just scratching the surface of what they can be a decade from now. Mall traffic appears to be in a permanent decline and once there is a terrorist attack at a U.S. mall, it will drop off even faster.

Moody's Chart

The economic calendar for the rest of the week is headlined by the FOMC minutes on Wednesday and the Philly Fed Manufacturing Survey on Thursday. Those are the only events that could trigger market movement.


Janet Yellen will give a speech at the Jackson Hole conference the following Friday and analysts believe she will try to prepare the market for a September rate hike. While nobody really expects a hike in September, there are analysts who believe the economy has improved sufficiently to warrant a hike if the August jobs reports continue to show strong gains.

The Atlanta Fed real time GDPNow forecast is for 3.6% growth in Q3. That is well over analyst consensus projections for 2.6% with some high profile analysts expecting from 1.8% to 2.2%. The Atlanta Fed has been right on the target until the first GDP release in Q2. The Fed was forecasting 2.4% growth and the BEA reported 1.22% growth. That was the first major miss in a long time. The analyst consensus for Q3 is currently 2.8%.


New York Fed President William Dudley said this week "the September meeting is not off the table" for a rate hike. Atlanta Fed President Dennis Lockhart said he expects one more rate hike in 2016. The Fed funds Futures are not expecting a hike in September so that is why Yellen's speech on the 26th is so important.


Currently the futures are predicting a rate hike in December. The elections will be over and the risk of being politicized will have passed. There will be four more employment reports and four more months of economic data before that meeting. The Fed rarely hikes in December but they may take this opportunity to squeeze one in before a new president takes office.


On the earnings front, Dow component Home Depot (HD) reported earnings of $1.97 that beat estimates by a penny. Revenue rose 6.6% to $26.472 billion and beating estimates for $26.437 billion. Same store sales rose +4.7% system wide with U.S. stores rising +5.4%. The company guided for the full year for revenue to rise 6.3% with same store sales rising 4.9%. Earnings are expected to rise 15.6% to $6.31, up from prior expectations for $6.27.

While that was a guidance raise and earnings were decent, the stock declined about $1 because the investor expectations were slightly higher and the market was weak. Barron's titled a note on the earnings as "Nothing to see here."


Dick's Sporting Goods (DKS) reported earnings of 82 cents compared to estimates for 69 cents. Revenue rose 7.9% to $1.97 billion and beat estimates for $1.88 billion. Same store sales were up +2.8% and analysts were expecting a -2.2% decline. The company guided for the full year to earnings of $2.90-$3.05 compared to prior guidance for $2.60-$2.90. Analysts were expecting $2.84. The forecast current quarter earnings of 39-42 cents and analysts were expecting 38 cents. Shares exploded to a new closing high of $58.76.


TJX Cos. (TJX) reported earnings of 84 cents that beat estimates for 81 cents. Revenue rose 7% to $7.88 billion and narrowly beat estimates for $7.85 billion. Same store sales rose +4% compared to expectations for 3.5%. They raised guidance on the comps from 2-3% to 3-4% for the full year.

Shares collapsed -6% after they guided for the current quarter to earnings of 83-85 cents compared to analyst estimates for 90 cents. They projected full year earnings of $3.39-$3.43 compared to their prior guidance for $3.35 to $3.42. However, analysts were expecting $3.48 per share.


Urban Outfitters (URBN) reported earnings of 66 cents compared to estimates for 55 cents. Revenue rose to a record at $890.6 million compared to estimates for $885.6 million. Same store sales rose 1% system wide compared to estimate for a -1.2% decline. Same store sales in the Urban Outfitters stores rose 5%, but flat at Free People stores and down -3% at Anthropologie stores. Shares spiked 9% to $34.50 in afterhours.


Advance Auto Parts (AAP) reported earnings of $1.90 that missed estimates for $2.12. Revenue of $2.26 billion beat estimates for $2.24 billion. Last year the company earned $2.27 per share on revenue of $2.37 billion. Same store sales fell -4.1%. The CEO blames it on store closures and the impact of the Carquest consolidations. They acquired 1,233 Carquest stores last year for $2 billion. Many have been closed or consolidated into the AAP chain. Shares fell -4.4% on the news.


Dow component Cisco Systems reports after the bell on Wednesday. Lowe's and Target head the retail sector list with Staples, Children's Place and American Eagle Outfitters also reporting.


Hain Celestial (HAIN) was the day's biggest loser. The company said it was delaying its earnings report because of accounting concerns and would probably miss its prior 2016 guidance. The company said, "During the fourth quarter, the Company identified concessions that were granted to certain distributors in the United States. The Company is currently evaluating whether the revenue associated with those concessions was accounted for in the correct period and is also currently evaluating its internal control over financial reporting."

In further discussions they said they were trying to determine if they should record and account for sales when the product was shipped to distributors or when the distributors actually sold the product to retailers. The problem is a new revenue ruling from the SEC that is going to impact a lot of companies in the months ahead. In many case it will require companies to book sales earlier than they did in the past. The rule is called FASB 606. The rule could make sales reporting much more volatile and Price Waterhouse Coopers warned it would be a tough challenge for most companies. The rule does not take effect until 2018 but normally companies try to implement the rules earlier to avoid accounting surprises.

Apple, Amazon, Cisco, Facebook, Intel, SalesForce.com, Boeing, Disney, Gilead Sciences and Qualcomm have already warned the rule will have a direct impact to their revenue recognition.

The new rule did not have a direct impact on HAIN in this cycle but this is a sample of what to expect when the rule goes into effect.

In Hain's case, they granted some distributors concessions based on their order patterns and the company is evaluating whether those concessions were booked properly into the correct accounting period.


Oil prices continued their OPEC chatter rebound to trade as high as $46.73. The OPEC ministers are keeping the potential production freeze headlines flowing and invoking Saudi Arabia in their comments to lend them credibility. Russia's energy minister said he would meet with OPEC members in October to discuss a possible freeze. However, Iran said they were unsure if they would take part in any discussions. They are in the process of ramping up production and do not want to halt that process.

The Nigerian oil minister threw some cold water on the headlines saying it was unlikely a freeze would be implemented in September.

Crude prices were also helped by a drop in the dollar to a 7-week low. After the bell the weekly API inventory numbers showed a decline of one million barrels but gasoline inventories rose +2.2 million and distillate inventories rose +2.4 million. This pressured WTI prices into a 30-cent decline in the evening session.





Markets

I cautioned in the weekend letter that the Friday selling was not a big deal. On Monday, I wrote it appeared we had achieved liftoff when all the indexes pulled significantly above the recent consolidation pattern. Unfortunately, that gain was completely erased when the major indexes closed at their lows and in the case of the S&P a four-day low.

One day does not make a trend in either direction. Monday's strongly positive market was erased by Tuesday's strongly negative market. BOTH days were more than likely due to option expiration pressures as investors close out August positions and launch September positions.

Bloomberg ran a story last week pointing out that insider buying was at a RECORD low. The number of officers and directors of companies purchasing their own shares declined by 44% to 316 and the lowest monthly total ever based on data going back to 1988. They theorized the heavy July earnings schedule plus the market holding near record highs kept insiders from rushing to buy their own shares. The only flaw in this scenario is that the market was making new highs last July during earnings and there was no slowdown in purchases.

The drop in insider buying corresponds to the drop in buying by investors in general. There is still no conviction to this rally and everyone is still waiting on the sidelines for a buying opportunity. With the next six weeks the most volatile period in the entire year, everyone expects to get that opportunity soon.

The S&P rallied to 2,194 on Monday and exactly to uptrend resistance. The index rolled over in the afternoon and continued its drop today to close on the exact low at 2,178. That is 3 points away from prior resistance at 2,175 which should be initial support. If that level breaks, we are targeting a retest of 2,150 from August 2nd.


The Dow also has three lines of converging resistance at 18,675 that halted the spike on Monday and the Dow gapped down to 18,614 at the open today and never looked back. The Dow closed at the low of the Day at 18,552. The Home Depot earnings did not help the index and since Cisco reports after the close on Wednesday, there will be no help there either.

Only six Dow components were positive and that could be a preview of things to come as the post earnings depression settles in for the next couple of weeks.

Support is 18,550 followed by 18,250. That is a long drop and I am not suggesting it is going to happen but that is the risk.



The +29 point Nasdaq gain on Monday was erased with a -34 point drop today. Support at 5,230 held until right at the close but a late bout of selling pushed the index to 5,227. Support is now 5,200 and that is a critical level. There are no high profile tech stocks reporting earnings tomorrow that are likely to push the index higher.



The Russell 2000 gave me false hope on Monday when it gained +12 points to a new 52-week high. When that gain was erased today, all the air went out of my balloon. Like the other indexes, the Russell closed at the lows for the day at 1,231. Despite my frustration, the index is still moving up the center of the uptrend channel and remains well above the bottom of the trend. The index could drop all the way back to 1,200 without breaking the rally. That level would be a good buying opportunity.


One of our long time readers has been permanently bearish for a long time. He sent me an email after my weekend commentary where I suggested we could be going higher.

I am going to have to pull out my old books and read up on this cr*p. I believe I read somewhere that you could actually make money in a bull market. I am probably going to have to re-program my computer, because if I place a long order it will reject it, and alarm bells will ring, and the hard drive will start smoking. How do you do this? Just hold your nose and buy?

Knowing his bearish history, I was laughing so hard I had tears. Yes, occasionally the market actually rises for prolonged periods despite the moniker of the "most hated bull market ever." Just remember we are headed into the most volatile six weeks of the year. Anything is possible so avoid being overly long or short.

Continue building your shopping list of stocks you would like to own and your ideal entry point. There may be a buying opportunity in our future and again maybe not.

My friend Art Cashin pointed out a market fact that bears repeating. Since 1950 when the market made new highs in August in an election year the winning candidate won by a landslide.

1956 Eisenhower - 41 states
1972 Nixon - 49 states
1980 Reagan - 44 states
1992 Clinton - 32 states

My theory on this is that investors saw the polls moving strongly in favor of the winner and the normal post election rally was pulled forward into August/September. That is just a theory. With Clinton so far ahead in the polls we could be seeing that repeat in 2016.

I apologize for the lateness tonight. We had a power outage in our area this afternoon that delayed the process.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Directional Trades

by Jim Brown

Click here to email Jim Brown
Editor's Note

The major indexes have alternated between gains and losses each of the last six days. With the futures positive tonight it looks like we could be headed for seven days. However, with all the indexes closing on their lows for the day, I am not willing to bet we are just going to retrace those gains back to new highs. The object of the game is to trade in the direction of the trend. The trend is currently sideways. This is expiration week with very low volume and a Jekyl & Hyde market. No new plays today.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Takeoff Aborted

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday's market takeoff turned into a launch failure with the indexes giving back more today than they gained on Monday. I was really glad to see the Monday spike to new highs because I thought it finally signaled a break from the consolidation resistance. Unfortunately, it was a one day wonder and the rally misfire turned into a rout.

While the indexes gave back more than they gained on Monday, the individual stocks in our portfolio barely moved. Twitter was the biggest mover at 46 cents but they had gained $3 over the last week. It wa sonly natural the stock would rest in a weak market.

It is hard to pick a direction here with the big spike followed by the big decline. However, since all the indexes closed on their lows, that suggests the potential for a continued decline.




Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


FDC - First Data
The long position remains unopened until $13.50. High today was $13.38.


NTCT - NetScout
The long position remains unopened until $28.85. High today was $28.81.


VSI - Vitamin Shoppe
This recommendation has been cancelled.



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BULLISH Play Updates

FDC - First Data - Company Profile

Comments:

No specific news. Back to resistance again.

This position remains unopened until FDC trades at $13.50. The high today was $13.38.

Original Trade Description: August 10th.

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. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

With a FDC trade at $13.50

Buy FDC shares, initial stop loss $12.65

Optional: Buy Oct $14 call, currently .55, no stop loss.



NTCT - NetScout - Company Profile

Comments:

No specific news but shares held their breakout gains.

The position remain sunopened until a trade at $28.85. High today was $28.81.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

With a NTCT trade at $28.85

Buy NTCT shares, currently $28.62, initial stop loss $27.10

No options recommended.



RDN - Radian Group - Company Profile

Comments:

No specific news but shares held their breakout gains.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.

Optional:

Buy Sept $14 call, currently .20, no stop loss.



TWTR - Twitter - Company Profile

Comments:

After a week of daily headlines there was no specific news. Shares pulled back slightly in the weak market. Volume crashed back to 23.5 million shares and normal.

On Monday volume surged to 58.8 million shares and nearly 3 times normal of 22 million in July. Option volume was through the roof with more than 200,000 call contracts traded. That was up from 44,000 daily in July and 95,000 a day last week.

Original Trade Description: - August 1st.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: August 13th.

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 segment's 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 Corporation was founded in 1886.

Unisys reported Q2 adjusted earnings of 81 cents compared to estimates for 25 cents. Those earnings more than doubled from the 36 cents in Q2-2015. Revenue of $748.9 million easily beat estimates for $688.1 million. Profit margins rose from -6.5% in Q2-2015 to +6.6%. They reaffirmed full year guidance for earnings, revenue, margins and free cash flow. They ended the quarter with an order backlog of $3.8 billion.

Technology revenue rose 30.7% and accounted for 18% of overall revenue. This is going to be a major profit center in future quarters. Profit margins in this unit rose 48%, up from 15.6% in the year ago quarter. Sales of the ClearPath software are soaring.

The Unisys Stealth security product was approved by the NSA for use in classified programs and making the product eligible for use by more than 20 countries to protect super sensitive systems and information.

On Thursday, Unisys won a government contract to move the Treasury Departments Comptroller of the Currency office to the cloud. This will affect more than 4,000 Treasury employees. Earlier in the year Unisys moved the U.S. Dept of the Interior and its SAP-based financial management system to the cloud.

This company is at the right place at the right time with the right security products and the NSA approval opens a tremendous business opportunity in those 20 countries.

Earnings Oct 25th.

Shares spiked to $10.40 on the earnings news and then traded sideways for two weeks. Over the last several days the trend has turned positive and it closed at $10.55 on Friday and a 5-month high.

Position 8/15/16 with a UIS trade at $10.65

Long UIS shares @ $10.65, see portfolio graphic for stop loss.




BEARISH Play Updates

VSI - Vitamin Shoppe - Company Profile

Comments:

Shares moved up again on no news. I am cancelling this recommendation.

Original Trade Description: August 8th.

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

Recommendation cancelled.





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