Option Investor
Newsletter

Daily Newsletter, Monday, 8/22/2016

Table of Contents

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

Market Wrap

Floundering Around

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market floundered for another day, just below the recently set all time high. There was very little to move the market today, and little this week, so listless sideways trading could persist into the near term. Earnings season is largely over and economic data is very light all week so the market will struggle for direction and focus on what it can, oil prices and the Jackson Hole conference. Oil prices seemed to have topped out again, WTI fell more than 3% today. The Jackson Hole conference promises at least more Fed Speak, Janet Yellen is scheduled to deliver her address on Friday.

International markets were mixed, anticipation for the Jackson Hole conference and Yellen's speech dominating sentiment. Asian indices were mostly flat, where one index fell a quarter percent another rose a quarter percent. In Europe trading was little more dour, indices made small losses across the board. The slide in oil prices helped EU markets fall and will likely have an impact on the Asian trade when it opens in the overnight session.

Market Statistics

Futures trading indicated a mildly negative open all morning, about -0.25%. The operative word though was mildly as that word could be used to describe trading for the rest of the day. At the open the indices were mildly lower, they then mildly rallied, and then mildly sold off again... mildly trending sideways all day and into the close of the session leaving them with little to no change.

Economic Calendar

The Economy

There was no economic data released today and there will be very little released this week. In all, there are about 8 reports worth tracking including weekly jobless claims. The important, most important, are new and existing homes sales, durable goods orders and the 2nd estimate for 2nd quarter GDP. The estimate is expected to be revised lower by a tenth. Next week is the turn of the another month, if you can believe it, which means a whopping dose of monthly macro-economic data including NFP and unemployment.

Stanley Fischer spoke to a conference in Aspen, CO Sunday and says that a rate hike is near and that the economy has nearly reached the Fed's goals in terms of employment and inflation. His comments fueled rate hike speculation and drove the dollar higher despite the fact they seem to contradict the FOMC's official stance. Regardless, Fed Speak could continue to support the dollar into the near term with next week's data deluge a potential catalyst to affirm or refute Fisher's take on the economy. The CME's Fed Watch Tool rose on the news, but only slightly, to 18% chance of rate hike next month and 22% chance the month after that.

My take; they've (The FOMC together and by it's individual members) been saying a rate hike is close for a long, long time and employment data has been at healthy levels for just about as long . . . inflation on the other hand has not yet risen to target levels and doesn't look like it will soon so it's hard to argue for a rate hike. I think this is evident in conflicting viewpoints expressed by the individual members, they never seem to agree and one of them always seems to be in the news. Fischer is hawkish today, one of them will be dovish tomorrow. Yellen is set to speak later this week, be sure every nuance of her words will be studied for meaning.

Moody's Survey Business Confidence fell by a full point last week to 25.9. Based on Mr. Zandi's remarks it seems as if global business is cautious in the wake of a number of global events including Zika, Brazil and Venuzuelan politics, Brexit and the Turkish coups. Sentiment is also generally positive and consistent with an expanding economy. South America is worst, North America is best (go USA!) and improvement is expected in 2017.


Earnings season is just about over and, as expected, is better than expected at the beginning of the cycle but not as much better than expected which might be a problem. Let me put it like this. Over the course of the past 4 years the average amount of change between the expected rate of growth at the beginning of the reporting season and the actual amount of growth at the end of the reporting season has been about +4%. The week Alcoa reported, regarded as the start of the earnings cycle, the expected rate of earnings growth for the entire S&P 500 was -5.6%. which makes -1.6% the end-of-cycle target rate for earnings growth, give or take. So, -3.2% is better than expected, but it's not as good as it should be.


Looking forward earnings growth outlook held steady over the past week. The bad news is that 3rd quarter outlook held steady at -2%. If this is as low as it gets we can expect the final amount of 3rd quarter growth to be at least positive, if not above 1%. The 4th quarter projection held steady at 5.5%. Full year 2016 earnings growth estimate came in at -0.4%, unchanged from last week and the third week of negative reading. Next year is still expected to see strong growth, 13.3%, but that's still a long way off.


The Dollar Index

The dollar strengthened in early trading, driven by Stanley Fischer's comment's, but was not able to hold the gains. Today's action created a pinbar doji/shooting star and shows a market that may have made a knee jerk reaction to comments and then decided the news may not be as important as first thought. It also shows a market with some support at the $94.31 level, near the 78.6% retracement level, although the move is tentative and faces at least a little resistance. The indicators are bearish, near term trend is down, but they also suggest some support is present at current levels. A break below support would be bearish, downside target near $93. A bounce, or a continuation of this bounce, would be bullish with upside target between $95.60 and $96.50. Tomorrow's New Home Sales data could move the needle, or more Fed speak.


The Oil Index

Oil prices fell hard today, more than -3%. The rumors surrounding a possible OPEC production freeze are evaporating, and support for oil along with it, while increased expectation for renewed output from Nigeria and disputed fields in Iraq add to over supply worry. One analyst says the OPEC comments were "well timed", hinting as I've suspected that they are merely trying to talk the market higher. WTI fell below $37 and looks like it is headed back to $45 or lower. Today was the expiration of the front month contract which may have added to volatility, tomorrow the new contract begins trading as the front month.

The Oil Index fell in today's action, pulling back from the top of its 5 month trading range. The index shed -1.16% but found support at the short term moving average, near the middle of the trading range. The indicators are rolling over, consistent with the top of a trading range, and suggest a move lower is coming. If support is broken a move to the bottom of the range, near 1,075, is likely. Support is in the range of 1,120 to 1,150.


The Gold Index

Gold prices wobbled a bit as the dollar moved on Fischer's comments. Spot price fell about a half percent to $1,338 but recovered most of the loss. Despite the narrow daily range gold hit a two week low today, but remains above near term support levels. Prices could move down to $1,320 before hitting critical support and may do so if data and/or Fed speak points to rate hike.

The gold miners fell in today's session. The miners ETF GDX fell more than -1.5%, trading beneath the short term moving average with bearish indicators. The move shows a bit of choppiness in the market that has been growing over the past few months. This is the 5th time the ETF has traded below the short term moving average since the uptrend began 7 months ago, the first 4 times provided nice trend following entries. This may do the same but as yet there are no confirmations of support. Both indicators are bearish and gaining strength so I would expect to see a test of support at these levels, near $29.50, before any move higher occurs. A break below support would be bearish and could take it down to $27.50 before hitting next support. If support at/near $29.50 is confirmed the bounce could take the ETF to new highs above the $31 long term resistance line.


In The News, Story Stocks and Earnings

Pfizer announced it was buying Medivation this morning before the opening bell. The deal is worth $81.50 per share, $14 billion, and brings a portfolio of drugs that Pfizer says will add at least $0.05 to earnings in the first year. Deal price is a 20% premium to Medivation share prices, which saw substantial gains in today's session. Pfizer however lost about -0.40% to trade near a two month low.


Shake up at the Williams Companies continues. Management company Corvex says it plans to nominate 10 of its own employees to the board at the next shareholder meeting, Williams Companies calls this an unfortunate event. Shares of Williams Companies fell nearly -1.0% on the news and is trading just below a 9 month high.


Valeant Pharmaceutical announced the appointment of a new CFO. Paul Herendeen, formerly of Zoetis, was tapped for the position. This is the second major executive suite change this year as the company tries to recover from recent lows. Shares of Valeant gained more than 8% on the news to close at a 3 month high.


The Indices

The market really didn't do much today, just another day trading in a tight range below recent highs. For the most part the indices closed flat on the day, most in negative territory but one was able to pull off a small gain. The NASDAQ Composite gained 0.12% in a move that created a very small white candle. Today's action did not set a new high but is very close to the current all time high, and sitting on support at the previous all time high. The index could be consolidating for a move higher but bearish and weakening indicators suggest a test of support at least should be expected. A break below support, near 5,220, would be bearish in the near term and could take the index down to the short term moving average near 5,150 or lower.


The index with the biggest loss was the Dow Jones Transportation Average. The transports fell -0.45% in a move that created a very small black candle testing for support just above the short term moving average. The index is drifting sideways, just below the upper end of a 6 month trading range, with indicators consistent with range bound trading. Support is just below today's level, near the short term moving average, and then just below that near the mid-point of the trading range at 7,750. If the index is able to stage a rally resistance is just above today's close near 8,000.


The S&P 500 made the smallest loss in today's session, about -0.06%. The broad market created a very small doji like candle within the two week consolidation band. It is above the short term moving average, closest support, and could be preparing to move higher but divergences in the indicators continue to persist. These divergences, particularly in the stochastic, are pronounced and typically lead to some kind of market weakness. A break below support, near 2,165, would be bearish in the near term at least and could take the index down to 2,120 or lower. I know I've been harping on potential market weakness for months, I have to because the charts show it. The caveat is that chart weakness doesn't always equate to correction.


The Dow Jones Industrial Average fell -0.12% and created a very small doji candle, below support, and looks set to pull back. The indicators have rolled into a bearish signal in the near term, confirming a significant divergence from prices in the short. First target for support is the short term moving average, near 18,400, with next target just below that near 18,300. A break below 18,300 could lead to a deeper correction down to 18,000 or lower.


The market melt-up may have run its course. It pushed the indices up to new highs, in most cases, but hasn't been able to do much since. There is optimism for the future, earnings growth is expected to return next year, but plenty of reason in the near term to be cautious. My number one concern is earnings growth and outlook into the end of the year but there are others, the FOMC and rate hikes, longer term impact of the Brexit, volatile oil prices and generally tepid global growth to name a few. These may just be bricks in the wall of worry but maybe not, without a catalyst to drive the market higher they may provide enough resistance to keep the market from moving higher. The near term trend is up, but I have to remain cautious until divergences in the charts play out, and the market quits floundering around.

Until then, remember the trend!

Thomas Hughes


New Plays

Advertising War

by Jim Brown

Click here to email Jim Brown
Editor's Note

The advent of sophisticated ad blockers has caused a war in the ad-serving marketplace. Facebook and one of the leading ad blocking applications have been changing their code almost daily to counter the others efforts. Some smaller companies do not have that luxury.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

RUBI - Rubicon Project - Company Profile

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

With a RUBI trade at $8.90

Short RUBI shares, initial stop loss $10.




In Play Updates and Reviews

Russell Gaining Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 closed only 3 points below its 52-week closing high thanks to strength in the biotechs. The Russell 2000 is our sentiment indicator for the market and the index is quietly moving higher while the Dow and S&P are struggling. The Nasdaq posted another minor gain as it continues to trade at the recent highs.

The Dow declined -100 points at the open and the dip was bought, several times, as the sellers continued to push it lower from each intraday bounce. The dip buyers were unable to close it back in positive territory but they came close. Volume was very low and should remain low until after Labor Day.




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


HZNP - Horizon Pharma
The long position remains unopened until $23.40. High today was $23.08.


VSI - Vitamin Shoppe
The short position remains unopened until $26.20. Low today was $26.67.


FDC - First Data
The long position remains unopened until $13.50. High today was $13.37.


ACAT - Arctic Cat
The short position remains unopened until $14.15. Low today was $14.59.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

FDC - First Data - Company Profile

Comments:

No specific news. Still fighting resistance at $13.35. New 4-month high close.

This position remains unopened until FDC trades at $13.50.

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.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Still fighting resistance.

This position remains unopened until HZNP trades at $23.40.

Original Trade Description: August 18th.

Horizon Pharma plc is a biopharmaceutical company that engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer.

On August 8th the company reported earnings of 56 cents that beat estimates for 53 cents. Revenue of $257.4 easily beat estimates for $238.1 million. They guided for full year revenue of $1.025 to $1.050 billion and analysts were expecting $1.02 billion. They also affirmed adjusted EBITDA in the range of $495-$510 million.

All three business units, Orphan, Primary Care and Rheumatology performed well. Primary care revenues rose 33%. Orphan revenues rose 51% and Rheumatology rose +211%.

They have multiple drugs rapidly gaining market share and multiple drugs in the pipeline. This stock could be a prospect for a long-term hold.

Earnings Nov 7th.

Shares broke through resistance on the August 9th earnings, consolidated and drifted back slightly to use that same resistance as support. Today's close was only 3 cents below an 11-month high. A continued push higher by even a few cents could trigger significant short covering with a target over $30.

With HZNP trade at $23.40

Buy HZNP shares, initial stop loss $21.85.

No options recommended.



MRO - Marathon Oil - Company Profile

Comments:

Marathon fell -7% after the CFO resigned for personal reasons. Pat Wagner was named interim CFO effective immediately while the company conducts a search for a successor. The company said the departure had nothing to do with the company or any disagreements over financials or accounting methods. Oil prices fell -$1.50 and that also weighed on the sector.

Original Trade Description: August 17th.

Marathon Oil Corporation operates as an energy company. It operates through three segments: North America E&P, International E&P, and Oil Sands Mining. The North America E&P segment develops, explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in North America. The International Exploration and Production segment explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya, and the United Kingdom; and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea. The Oil Sands Mining segment mines, extracts and produces oil from Alberta and Canada.

Marathon reported a Q2 loss of 23 cents beating estimates by a penny. Revenue of $1.3 billion beat estimates for $1.19 billion. Q2 production averaged 384,000 Boepd and in line with guidance. U.S. production averaged 189,000 Boepd. They said they were adding extra rigs in Q3 thanks to new inventory of leases in the STACK play Oklahoma. Raymond James upgraded them from outperform to strong buy and Bank of America upgraded them from neutral to buy.

Earnings November 2nd.

Shares are poised to break over resistance at $15.75 as OPEC chats up the headlines about a possible production freeze in late September. The next material resistance is $20.

Position 8/18/16 with a MRO trade at $16.05

Long MRO shares @ $16.50, see portfolio graphic for stop loss.

Optional:

Long Oct $17 call @ 70 cents. No initial stop loss.



NTCT - NetScout - Company Profile

Comments:

No specific news and only a minor 10 cent decline in a mixed market.

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.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.



RDN - Radian Group - Company Profile

Comments:

No specific news. Minor gain in a mixed market.

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.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.

Optional:

Long Sept $14 call @ .15, no stop loss.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. No movement.

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

ACAT - Arctic Cat - Company Profile

Comments:

No specific news. Minor bounce on bargain hunting in a mixed market.

This position remains unopened until a trade at $14.15.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

With a ACAT trade at $14.15

Sell short ACAT shares, currently $14.81. Initial stop loss $16.00.

There are some bad ticks recently and I would like to avoid being stopped out on a bad upside tick. Once in the position I will reset the stop loss.



VSI - Vitamin Shoppe - Company Profile

Comments:

Zacks reiterated their bear of the day, strong sell rating but shares gained 27 cents. We have seen 3 days of minor gains but I am keeping the recommendation open after that big drop last week that could easily happen again.

This position remains unopened until a trade at $26.20.

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.

With a VXI trade at $26.20

Short VSI shares, initial stop loss $27.20.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now