Option Investor
Newsletter

Daily Newsletter, Monday, 10/3/2016

Table of Contents

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

Market Wrap

Churning, Rotation, Preparation

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market continues to churn as we approach the return of earnings growth. The indices are, for the most part, moving sideways within narrow ranges pinpointed on the peak of the coming earnings cycle, as well as the next FOMC meeting and the presidential elections scheduled for early November. It's hard to say which event will break the market out of this trend, or even if they will, but for now those are the most likely catalysts. Today's action was light and to the downside but well within September trading ranges and without much conviction. Earnings news was light, economic data mixed.

International indices were a bit mixed but mostly up in the Monday session. Asian equity markets closed with gains in the range of 1%, a little weaker in the mainland Chinese market, with focus on a new Brexit deadlined issued by the British UK dominating headlines. The news is that there is now a timetable for the Brexit, at least a time by which to expect the invocation of Article 50 of the Lisbon Treaty, the official start of Brexiting. European markets were a little subdued, Germany was closed for a holiday, but largely moved higher, led by a 1.22% move in the FTSE.

Market Statistics

Futures trading indicated a slightly negative open all morning. There was very little new news to move the market this morning so trading was relatively calm. The indices were soft after the opening bell, opening with a loss and moving lower within the first minutes to set the early low before the fires half hour was up. The next hour saw the indices bounce to retest the opening price and then move lower to test the early low and move lower again. A third intrady low soon followed, itself followed by a small bounce that did little to regain the intraday losses, about -0.55%.

Economic Calendar

The Economy

Auto sales data was released intermittently throughout the day, the official sales numbers not released until mid-afternoon. Early indications showed a decline but not one as big as feared. Despite this fear of a sales peak persisted throughout the morning. GM -0.6%, Ford -7.7%, Fiat Chrysler -0.9%, Toyota the only one with gains, +1.5%, and Honday, -0.1%. The good news is that sales topped estimates. The official report shows a 17.76 annualized pace, above expectations and what could become a new record.

ISM and Construction Spending were both released at 10AM. September ISM Manufacturing was another positive for the day, climbing 2.1% to hit 51.5, a half percent better than expected. Gains were made in New Orders, Production and Employment suggesting a pick up of activity could be expected in the fourth quarter. New Order rose 6 points to 55.1, Production jumped 3.2 to 52.8 and Employment gained 1.4 to 49.7. Employment remains slightly contractionary.

Construction Spending fell -0.7% in August versus an expected gain of 0.2%, according to the Census Bureau. The drop brings the year over year total down to -0.3%, the first month of contraction in spending. The monthly decline was mostly due to non-residential spending, -1.1% versus a drop of -0.2% for residential. Year over non-residential spending has been lagging and is now down -1.3% versus a gain of 1.3% in residential spending.

Moody's Survey Of Business Confidence fell by a whopping -0.1% to hit 25.0. This is the lowest level since the end of August. Sentiment appears to be holding steady at current levels but remains well below the all time high set last year. Mr. Zandi says sentiment is consistent with a global economy expanding near its potential. Businesses are cautious about present conditions, as they have been for the past year or so, but remain optimistic about the future.


The blended rate of earnings growth for the S&P 500 in the 3rd quarter is now -2.1%. This is up a tenth from last week. There have been 18 reports so far, 15 have beaten on the EPS side and 11 on the revenue end. Seven more reports are due out this week, the season really gets underway next week with Alcoa and several of the big banks including scandal plagued Wells Fargo. While we can expect to see the blended rate improve over the course of the season how much is in question. Estimates for fully 10 of the now 11 S&P 500 sectors have been revised lower and 80 companies have issued negative guidance.


Looking forward outlook remain positive but continues to soften. Fourth quarter 2016 was revised lower by a tenth to 5.6%, full year 2016 was revised higher by a tenth but remains negative at -0.2% and full year 2017 was revised lower to 13%. The optimistic view is that the 3rd quarter will end with positive growth, leading us into a period of expanding growth beginning with the 4th quarter and extending into the next year. The pessimistic view is that earnings growth will not return this quarter and forward outlook will continue to erode.


Data is going to be on the heavy side this week. It's the turn of the month and the first week of a new quarter so lots of important monthly macro data and the last read in many cases for 2nd quarter activity. The highlight of course is the NFP report on Friday, along with unemployment and earnings figures, but there are many others.

The Dollar Index

The Dollar Index gained a quarter percent today but remains range bound, trading near the center of the range. The index continues to wind up within its narrowing range and will likely continue to do so until the FOMC meeting in just about 5 weeks. There are some other events which will likely drive volatility, the ECB meeting and BOJ meeting, but the FOMC meeting and possibly interest rate hike is the biggest risk to currency markets now. I expect to see the Dollar Index trend near $95.60 in that time. This week's NFP report could spark a move, if it is good/bad enough to truly change FOMC outlook. The CME Fed Watch Tool shows only an 11.4% chance of rate hike at the next meeting.


The Oil Index

Oil prices gained a little more than 1% today on remark between Iran's president and the president of Venezuela, basically to the effect that oil producing nations needed to band together to support prices. While bullish, the news has about as much impact on global oversupply issues as last week's OPEC deal so is likely to only provide support in the nearest of terms. Today's action was able to set a new 1 month high for WTI, just over $48.75, but prices remain below resistance and range bound.

The Oil Index held flat in today's session, despite the gain in oil prices. Today's candle is a small doji, possibly a hanging man, indicative of indecision. With the details of the OPEC deal so questionable, and supply still overshadowing supply, there is quite a lot for the market to consider. The Oil Index remains range bound but may be moving higher to test the upper boundary, near 1,175. A break above this level does not look likely at this time.


The Gold Index

Gold prices slipped today but held above critical support levels. Spot price fell about a quarter percent to hit $1,313 and are holding above $1,300. Gold, like the dollar, is trading in a tightening range that is most likely focused on the next FOMC meeting. Support is just above $1,200, resistance just below $1,350.

The gold miners were not so bouyant, the miners ETF GDX shedding more than -2.6% to trade just below the rising near-term support line I drew last week. The ETF may be breaking out of the current pattern but without a similar break in gold it is more likely testing for support. The indicators remain consistent with range bound trading, if also with a move to support. A break to the downside would be bearish for the sector and could lead the ETF down to $22.50 or lower.


In The News, Story Stocks and Earnings

Tesla made headlines today when it announced record deliveries and its best sales quarter ever. The company reported a roughly 70% increase in deliveries and a 37% increase in production over the previous month but did not raise guidance. Full year guidance was maintained but nonetheless investors were cheered. Shares of the stock rose more than 4.5% to trade at a 1 month high.


Deutsche Bank gave up some of the Friday gains but was able to hold above $12. Negotiations with the DOJ are ongoing, the inside scoop is that progress is being made but a deal is yet to come. Jamie Dimon, in a vote of confidence during a televised interview, said the bank should have no trouble overcoming its problems. Shares of the stock fell just over -1.25%.


Netflix rose more than 4% today on talks it is a takeover target for Disney. There is no official word yet on a deal, proposed deal or interest in a deal but speculation is running wild. Today's action took the stock up to a 4 month high, almost 5, on twice average daily volume.


The Indices

The indices posted declines nearly across the board today but there was one exception, the Dow Jones Transportation Average. The transports gained about 0.30% in a move that stopped short of my resistance line near 8,100 and the top of the 7 month trading range. The index may test, continue to test, resistance into the near term because momentum is still building. Otherwise, the indicators are bullish but still consistent with range bound trading. A break above the range would be bullish but it looks like it will hold for now.


The largest decline was posted by the S&P 500, about -0.33%, but it was not enough to break the index out of its new trading range. The broad market created a very small spinning top candle at the short term moving average, above the middle of the trading range, but it does not look very strong. Both indicators are bullish but also consistent with range bound trading so no break-out is expected tomorrow. Looking to the indicators MACD is only barely above the zero line, a sign of sideways trading, and stochastic is already rolling over to continue its trend through the neutral zone which is also indicative of sideways trading. The top of the range is near 2,180 the bottom is near 2,120 and both may be tested in coming weeks.


The Dow Jones Industrial Average made the next largest decline, just over -0.30%. The blue chips created a very small black candle, nearly a doji and the smallest daily range since volatility returned, under the short term moving average, the mid point of the trading range and my resistance line at the previous all-time high. The indicators remain consistent with range bound trading and may lead to a test of support near the 18,000 level. A break above mid-point resistance, 18,250, would be bullish but might only be near term in nature, the index returning to the top of the range near 18,500.


The NASDAQ Composite posted the smallest decline in today's session, only -0.18%. The tech heavy index was boosted by good news from Tesla and the Netflix rumor but not enough to break it out to new highs. The index created a very small white candle, spinning top in nature, near the top of the September range and above the short term moving average. The indicators are still consistent with range bound trading, but indicating a move lower within the range at this time. First target for support is the short term moving average, near 5,250, next target is just below that at a previous all time high. If these levels are broken a move down to 5,085 and the bottom of the September range is possible.


The indices are range bound and nothing changed about that today. The churn, dare I say sector rotation, is in full swing. The most likely target, time wise, for the range to be be broken for bulls or for bears is early November. That time frame is the peak of earnings seasons, it is when we have the election and its when the next FOMC meeting is scheduled.

What happens then is up for grabs but I think whatever happens, it'll be part of a process setting the market up for long term earnings driven gains going into 2017 and perhaps beyond. Before then, this week, trading ranges are likely to persist until Friday when there is a small chance they could be broken. The NFP report, labor/earnings data in general, could sway FOMC outlook and move the needle in terms of rate hike expectations and by extension the market. I remain cautious, collecting my covered calls and dividends, patiently waiting for the next big move to announce itself.

Until then, remember the trend!

Thomas Hughes


New Plays

Buying New Highs

by Jim Brown

Click here to email Jim Brown
Editor's Note

There is actually a trading strategy that has won numerous trading contests by acquiring stocks that are making new 52-week high rather than buying stocks that have sold off significantly and look like they are ready to rebound. The theory is that momentum attracts buyers and weakness scares buyers away. I have made good money on both strategies. Today we are buying a 5-year high.



NEW BULLISH Plays

FNSR - Finisar Corp - Company Profile

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

With a FNSR trade at $30.25

Buy FNSR shares, initial stop loss $27.50

No options recommended because of cost. The Dec $32 call is $1.45 if interested.




NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Range Bound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market continues to be range bound as we enter the October volatility period. The S&P-600 small cap index closed at 754 and right in the middle of the range for the last week. The S&P-500 closed at 2,160 and right in the middle of its range. The same goes for the Dow at 18,251.

There is no conviction from either the bulls or the bears as we enter October. Typically the market makes the lows for the second half in the first 12 days of October. That is not likely to happen but the Dow would only have to decline 500 points to 17,700 to qualify. I do not see that in the current market action and I see no events on the horizon that could generate that kind of volatility. However, market can decline at any time for any reason or with no reason at all.

Fortunately, the last two weeks of October are known for strong rallies.




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


ALRM - Alarm.com
The long stock position was opened with a trade at $29.05.


CREE - Cree Inc
The long stock position remains unopened until a trade at $26.00.



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

AAOI - Applied OptoElectric - Company Profile

Comments:

Minor decline from resistance. No specific news.

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.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



ALRM - Alarm.com - Company Profile

Comments:

Roth Capital initiated coverage with a buy rating and price target of $33.50.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.



BOX - Box Inc - Company Profile

Comments:

No specific news. A breakout to a new 14-month high.

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.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



CREE - Cree Inc - Company Profile

Comments:

No specific news. The high today was $25.97 so we came very close to entering the position.

This position remains unopened until a trade at $26.

Original Trade Description: September 28th.

Cree, Inc. provides lighting-class light emitting diode (LED), lighting, and semiconductor products for power and radio-frequency (RF) applications in the United States, China, Europe, South Korea, Japan, Malaysia, Taiwan, and internationally. Its Lighting Products segment offers LED lighting systems and bulbs for use in settings, such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, and other applications. This segment sells its products to distributors, retailers, and customers. The company's LED Products segment provides blue and green LED chip products for use in various applications, including video screens, gaming displays, function indicator lights and automotive backlights, headlamps, and directional indicators. It also offers XLamp LED components and LED modules for lighting applications; and surface mount and through-hole packaged LED products for video, signage, general illumination, transportation, gaming, and specialty lighting applications. In addition, this segment provides silicon carbide (SiC) materials for RF, power switching, gemstones, and other applications. Its Power and RF Products segment offers SiC-based power products consisting of Schottky diodes, SiC metal semiconductor field-effect transistors, and SiC power modules for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies, and other applications. This segment also provides gallium nitride (GaN) high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs) for military, telecom, and other commercial applications; and custom die manufacturing services for GaN HEMTs and MMICs. Company description from FinViz.com.

Last week Cree introduced a new bulb portfolio of 25 new products. They offer better light quality, better dimming, better lifetime, better warranty and better pricing. LED lighting has finally gone mainstream.

Everybody hates to change light bulbs and the new product line has a life expectancy of 22 to 32 years. The light color has been improved and you can now dim them to as low as 1% output. The new bulbs are now guaranteed for a minimum of 10 years with a 100% satisfaction guarantee. The good news is that LED bulbs are only one of Cree's multiple product lines.

With the democratic political platform strongly green energy based and advocating products that reduce climate change, Cree should be at the top of the green list. The 60-watt replacement bulb offers the same 815 lumens of light but only consumes 9 watts of power. The downside is the cost at $12 for a 4-pack. The upside is a $135 savings in electricity over the 22.8-year life of the bulb.

Cree shares fell -4.50 to $23 when they missed earnings by a penny in August. They also lowered guidance on revenue for the current quarter. That is now behind them and shares are at a seven week high of $25.50. The last week of gains has been powered by multiple new product announcements and suggestions to buy before a Clinton presidency.

Earnings Oct 18th.

The earnings are only four weeks away so this will be a short term position to capitalize on all the "green" talk over the next several weeks.

With a CREE trade at $26.00

Buy CREE shares, currently $25.53, initial stop loss $24.50.

No options recommended because of the short time frame.



KS - KapStone Paper & Packaging - Company Profile

Comments:

No specific news. Minor decline, holding at prior resistance. Bank of America upgraded from neutral to buy.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.




BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile

Comments:

No specific news. Decent rebound to put it 25 cents below our stop loss. If this move continues we could be stopped out on Tuesday.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.

Optional:

Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

VXX down in a weak market. New lows coming.

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.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.



ZOES - Zoes Kitchen - Company Profile

Comments:

No specific news. Minor rebound after the new low on Friday.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.





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