We did see a pre Fed market gain but it was very lackluster. Typically the day before a Fed announcement is positive but today's gain was very light. The big cap indexes did close positive but the small caps closed negative.
The market direction for the rest of the week will be governed by the BoJ and Fed announcements on Wednesday. At this point fundamentals do not matter.
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.
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
SHLD - Sears Holding
The short stock position was opened at $12.00.
SWHC - Smith & Wesson
The short stock recommendation has been cancelled.
WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.
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BULLISH Play Updates
AAOI - Applied OptoElectric - Company Profile
No specific news. Minor decline in a mixed market.
Original Trade Description: September 17th.
Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.
For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.
AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.
Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.
Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.
Earnings Nov 3rd.
Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.
I am putting an entry trigger on it just in case the recently volatile market gaps down.
Long AAOI shares @ $22.10, initial stop loss $19.25
BOX - Box Inc - Company Profile
No specific news. Only a minor 1 cent decline in a mixed market.
Original Trade Description: September 15th.
Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.
In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.
The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.
Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.
Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.
Box also partnered with Apple and Amazon in other collaboration projects.
By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.
Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.
Long BOX shares @ $14.74, see portfolio graphic for stop loss.
NPTN - Neophotonics Corp - Company Profile
No specific news. Shares fell -8% from the new high to stop us out. I am going to monitor this for a reentry after the Fed announcement.
Original Trade Description: September 17th.
NeoPhotonics Corporation develops, manufactures, and sells hybrid photonic integrated optoelectronic products that transmit, receive, and switch high speed digital optical signals for communications networks. It offers high speed products, including transmitter, receiver, and switching products for 100G (gigabits per second) and optical transmission applications over distances of 2 to 2,000 kilometers; and optical components for coherent systems, including narrow line width tunable transmit and local oscillator lasers (NLW-ITLA), which generates ultra-pure wavelength, or color for coherent transmission, as well as integrated coherent receivers (ICRs), which decodes the phase and polarization encoded coherent signal. The company also engages in developing pluggable coherent modules that combine NLW-ITLA with ICR and with a coherent modulator; and offers 100G products for the client side and datacenter applications, as well as components, such as externally modulated lasers and high-speed drivers. In addition, it offers network products and solutions, including application-specific passive optical functionalities in modules or sub-system configurations; and products for test and measurement, instrumentation, industrial, and research applications. Company description from FinViz.com.
For Q2, the company reported earnings of 15 cents that beat estimates for 13 cents. However, revenue of $99.1 million narrowly missed estimates for $100.7 million. For Q3 the company guided to revenue of $100-$106 million and earnings of 9 to 17 cents. They guided for 20% revenue growth for the rest of 2016 and 25% growth from 2017 through 2019.
The company held an investor day last week and said China would be a big part of the company's growth in that 2017-2019 period. China Mobile (CHL) is the biggest wireless phone company in China and their request for proposals to supply equipment suggest a 30% to 60% increase in orders over the 2016 rate. Also, Verizon is planning a network upgrade to 100 Gbps in all its metro areas and that will mean a lot of business for NPTN according to Piper Jaffray. Needham raised the price target to $22 after the investor day.
Other companies expected to benefit from the super cycle are OCLR, AAOI, LITE, IHI, FN, ACIA and CIEN.
Earnings Nov 7th.
NPTN closed at a new high on Thursday and pulled back only slightly on Friday in a weak market. With analysts raising estimates after the investor day, I think it will continue to set new highs. Shares broke over resistance at $16.50 on Sept 7th. That should now be uptrend support.
I am putting an entry trigger on it just in case the recently volatile market gaps down.
Closed 9/20/16: Long NPTN shares @ $18.30, exit $16.85, -1.45 loss.
PTLA - Portola Pharmaceuticals - Company Profile
No specific news. Minor gain in a mixed market.
Original Trade Description: September 12th.
Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.
The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.
In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.
Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.
Earnings Nov 9th.
Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.
Position 9/14/16 with a PTLA trade at $22.25
Long PTLA shares @ $22.25, see portfolio graphic for stop loss.
(Wide stop loss because of the market volatility. I will raise it when it makes sense.)
BEARISH Play Updates
SHLD - Sears Holdings - Company Profile
No specific news. Nice decline to open the position.
Original Trade Description: September 19th.
Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.
The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.
After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.
The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter.
Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.
In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.
In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.
Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.
Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.
When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.
The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.
Short SHLD shares @ $12.00, see portfolio graphic for stop loss.
SWHC - Smith & Wesson - Company Profile
No specific news. I am cancelling this recommendation.
Original Trade Description: September 14th.
Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility; provides metal processing and finishing services comprising tooling, forging, heat treating, finishing, plating, and plastic injection molding, as well as engineering support services to third-party customers; and licensing of trademarks to third parties. Company description from FinViz.com.
Smith & Wesson has been posting some outstanding earnings thanks to rapidly rising gun sales only those sales are slowing now that Trump has pulled even or slightly ahead of Clinton. Trump is pro gun and Clinton is anti gun. As long as his numbers are improving, gun sales are likely to slow. However, should Clinton surge into the lead again, the numbers will rocket higher. Consumers are not going to spend hundreds of dollars to buy another gun if they think their gun rights will be safe for another 4 years. If Clinton surges into the lead again, they will be out in force buying those "extra" guns. The biggest surge will occur if Clinton wins the election on Nov 8th. At that point we want to be long every gun manufacturer and ammunition maker.
Shares have sold off despite great earnings and raised guidance because FBI background checks slowed in August to only a 6% rise compared to 37% growth in July and 39% in June. The actual number of checks fell from 2.19 million in July to 1.85 million in August.
Earnings Dec 1st.
VXX - Volatility Index Futures - ETF Description
The VIX/VXX declined again in a mixed market. This is additional confirmation the product is weak and we should see significant declines once an October rally begins.
There was a major increase in volatility only a couple days after we entered the position. There will be ups and downs. Just hang in there and the long-term trend will always be down.
If you are not already in this position the spike today would be an excellent place to enter a new short.
Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.
Original Trade Description: September 6th.
The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.
Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.
Short VXX shares @ $33.88, no initial stop loss.
No options recommended because of price.
WFM - Whole Foods Market - Company Profile
No specific news. No material movement.
On Thursday 9/15, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.
This position remains unopened until a trade at 27.75.
Original Trade Description: September 14th.
Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.
Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.
Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.
I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.
Earnings are Oct 26th and investors should be afraid to hold into that event.
With a WFM trade at $27.75
Short WFM shares, initial stop loss $28.75
Optional: Buy Nov $25 put, currently .60, no stop loss.
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